By Bul Ekici: AI has turned U.S. equities into a magnet for foreign capital. Once hedge ratios are taken into account, this channel matters for the dollar. The key question is whether an AI correction unfolds as a U.S.-specific reallocation or as global stress.
Foreign demand for U.S. equities has become a material channel for the dollar. When large institutional investors buy American stocks without hedging the currency exposure, the equity flow is also a dollar flow. When the same investors later raise hedge ratios, sell assets or repatriate capital, the channel can reverse. The hedge ratio is therefore an important macro-financial variable.
The channel matters. In the twelve months to June 2026, foreign net purchases of U.S. equities reached around USD 920 billion, more than three times foreign net purchases of long-term Treasuries. A significant part of this demand has been linked to the search for AI and technology exposure. The open question is what happens to the dollar if that enthusiasm fades.
Japan — the clearest illustration
Japan shows the mechanism most clearly. Foreign investors’ share of Japanese listed equities rose to nearly 35 percent in 2025 from just over 32 percent the year before. Inflows were strong and the equity market performed well. Yet the yen weakened.
Part of the explanation lies in hedging behaviour. Japan Research Institute estimates that, at a 30 percent hedge ratio, a 1 percent rise in Japanese equities could imply around JPY 1 trillion in yen-selling through hedge adjustments. TOPIX rose 17 percent in the first half of this year. That increase could have implied potential yen-selling flows of around JPY 17 trillion, about 2.5 percent of GDP. Japanese authorities intervened with JPY 11.7 trillion (1.7 percent of GDP) to support the currency. The yen still fell by around 2.6 percent against the dollar. In other words, the equity rally itself, once partially hedged, could have generated yen-selling pressure of a size comparable to, or larger than, official intervention. This is the hidden channel.
The same mechanism elsewhere
The United States in 2025 pointed in a similar direction. The dollar’s weakness coincided not only with political uncertainty, tariffs and shifting rate differentials. The New York Fed noted that market participants linked part of the depreciation to foreign investors raising hedge ratios on dollar assets from historically low levels. It looked more like a reallocation and hedging regime than a full stress episode.
Sweden offers another angle. For investors whose U.S. equity exposure is largely left open, sales of American holdings and repatriation of capital create a direct link to the krona. In 2025 the krona strengthened by just over 16 percent against the dollar but only around 9 percent in trade-weighted terms. Fund-flow data showed net outflows from North America funds equivalent to close to 1 percent of GDP. These data are not a direct measure of FX transactions, but they indicate that portfolio reallocations can be large enough to matter for the krona.
The Swedish AP funds illustrate the institutional layer. They hold large U.S. equity positions but operate under rules that limit open currency exposure. Their open FX exposure averaged around 24 percent of fund capital since 2011 and rose to 25.7 percent in 2025, roughly 9 percent of Swedish GDP. A shift of 3–5 percentage points equals 1–2 percent of GDP and is therefore macro-relevant. Because the funds often move in the same direction, the aggregate effect can be material. The increase in open exposure in 2025, however, does not appear to have been primarily USD-driven, but rather reflected changes in regional mix, currency mix or hedging profile.
Short-dated FX hedges, often with maturities of three to four months, transform rather than eliminate risk — a mechanism highlighted by the Riksbank in its 2026 Financial Stability Report. In stress, rollover and liquidity pressures may make equity sales part of the adjustment needed to stay within mandates, reinforcing procyclical behaviour.
Regime dependence
The currency impact is not automatic. If a correction in AI-related equities remains relatively U.S.-specific, the equity-flow channel can turn against the dollar. South Korea’s experience this year shows how an idiosyncratic technology shock can coincide with foreign equity sales and currency weakness: the won weakened by around 5 percent against the dollar in the first half of the year while foreigners sold Korean equities.
If the shock broadens into global risk aversion, the outcome is less clear. Safe-haven demand for dollars and funding pressures may dominate initially. Only later may repatriation and higher hedge ratios push in the opposite direction. The result depends on which force dominates and in what sequence.
Implications
Currency risk in institutional portfolios is a macro-financial channel. In a world where U.S. equities dominate global portfolios, equity flows and hedging behaviour are part of the dollar’s transmission mechanism.
The hedge ratio determines whether a U.S. equity position is also a dollar position. In a reallocation regime, higher hedging or lower U.S. exposure can put pressure on the dollar. In a global stress regime, the dollar may still strengthen initially through safe-haven flows.
Liquidity risk in short-dated hedges is often under-appreciated. When markets become stressed, the cost or availability of rolling those hedges can force portfolio adjustments that amplify rather than dampen moves.
Bul Ekici is an independent economist. She spent 19 years at the Riksbank and has also held roles at the Third Swedish National Pension Fund, Länsförsäkringar, HSBC and Skandiabanken.
