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Goldman Sachs has identified betting against the U.S. dollar in favor of the Japanese yen as a potential hedge against an artificial intelligence-driven stock market selloff.
Bloomberg reported that strategists, including Kamakshya Trivedi, outlined the strategy in an October 23 note. The recommendation followed renewed selling across global technology stocks, which pushed investors toward assets traditionally favored during market uncertainty.
Goldman Sachs expects the yen to offer stronger protection when concerns about economic growth trigger simultaneous declines in stocks and government bond yields.
The strategists wrote that 'the yen now looks like a more attractive hedge' for portfolios exposed to economic cycles. However, they cautioned that broader global conditions could still put downward pressure on the Japanese currency.
Their preferred longer-term strategy involves selling the U.S. dollar against the yen, commonly known as shorting USD/JPY. Such a position gains value when the yen strengthens relative to the dollar.
'Short USD/JPY should be the most effective hedge,' the strategists wrote, referring to broader economic weakness or a potential AI-related market shock.
For now, Goldman Sachs favors selling the euro against the yen. The bank expects limited near-term support for a sustained yen rally and sees little chance of an unexpectedly aggressive message from the Bank of Japan at its October meeting.
The recommendation follows a retreat in Japanese equities as investors reassess the outlook for artificial intelligence spending.
Japan's Nikkei 225 closed at 62,693.16 on October 23, approximately 14% below its reported record level. Semiconductor and other technology-related companies contributed to the decline.
Selling continued on October 26, when the Nikkei dropped another 0.80% to 62,189.65, its lowest closing level since July 30.
Meanwhile, the yen gained 0.9% against the U.S. dollar on October 22 as Treasury yields declined. It reached its strongest level in more than a month the following day before surrendering some gains.
Goldman's assessment comes as concerns over AI investment spread across financial markets. A recent Bank of Korea warning addressed risks associated with borrowing and leveraged investments linked to semiconductor and AI stocks.
The bank believes falling U.S. stock prices and bond yields could favor the yen, based on its historical performance during periods of weaker economic expectations.
Goldman Sachs linked its changing assessment to Japan's monetary policy. The Bank of Japan has moved away from the policies that previously kept domestic borrowing costs unusually low.
The BOJ currently maintains its policy rate near 1.25%. Goldman said the yen has become less sensitive to rising global yields than it was during the previous six to seven years.
However, borrowing in yen to fund investments in higher-yielding assets remains an important market consideration. Previous episodes of yen strength have raised concerns about the unwinding of yen carry trades.
Attention now turns to the Federal Reserve's October 27–28 meeting and the Bank of Japan's October 29–30 policy meeting.
The Fed is widely expected to leave rates unchanged in October, while markets anticipate possible increases by both central banks in December.
According to the BOJ's official schedule, its next policy announcement will come on October 30. The Federal Reserve will announce its decision on October 28, alongside a press conference.
The banks will then meet again in December, with the Federal Reserve's final 2026 meeting scheduled for December 8–9 and the BOJ's for December 17–18.
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