The surge in artificial intelligence-linked equities is having a bigger impact on currency markets than traditional economic fundamentals, according to Bank of America. The bank argues that foreign exchange hedging by global investors has become an increasingly important driver of major currency moves. The Japanese yen has faced the greatest downside pressure among G10 currencies as overseas investors hedge their exposure to Japan's booming equity market, with the Nikkei 225 significantly outperforming other major equity indices since the second quarter of 2025. Bank of America estimates these flows may have weighed on the yen by as much as 10%, helping explain why the currency has remained weak despite supportive balance-of-payments data and higher Japanese interest rate expectations. Outside Japan, hedging flows have generally supported currencies such as the Swedish krona, Swiss franc, Canadian dollar, and Australian dollar, while the U.S. dollar may have experienced modest selling pressure. Looking ahead, the risk-reward has shifted in favor of a stronger yen, as a slowdown in the AI-driven equity rally combined with possible Japanese foreign exchange intervention could reverse recent weakness, leading the bank to favor lower CHF/JPY and CAD/JPY.
Bank of America CorpBank of America's research is cited, but the article reports its analysis, not a direct impact on the bank itself.