The yen is surging. Here's how it could hit portfolios around the world

The yen's surge is reviving memories of the market-rattling carry-trade unwind of summer 2024.

AI winners like Nvidia and AMD could get sold if the yen's rise forces investors to unwind bets.

A stronger yen could squeeze Japanese companies like Toyota and Sony that rely heavily on overseas sales.

The Japanese yen is surging, reviving an uncomfortable memory for investors: the carry-trade turmoil of the summer of 2024.

Early on Wednesday, a dollar bought about 153 yen, about 4% fewer than at the start of the month and 2% fewer than at the start of the year as the Japanese currency strengthened. The currency pair had surged to a four-decade high near 164 in late July.

The rally matters well beyond the currency market. For years, investors have borrowed cheaply in yen and put the money into higher-yielding currencies and riskier assets around the world.

A rapidly strengthening yen can make those trades unprofitable and prompt investors to unwind positions, potentially triggering selling across stocks and bonds.

"When investors have to sell in a hurry to cover a currency bet gone wrong, they sell whatever they hold, and that can mean stocks, bonds and funds that ordinary savers are invested in too, often through their pension or their workplace retirement plan," said Nigel Green, CEO of deVere Group, a financial advisory firm, on Tuesday.

That is how a sharp move in the yen can ripple into the portfolios of investors who have never traded the currency.

5 ways the yen rally could hit your portfolio

1. AI winners could become a source of cash

One place the fallout could show up is in some of the market's biggest AI winners.

Nvidia, Broadcom, AMD, and TSMC, along with memory makers such as Micron, could be vulnerable if the yen's rally triggers forced deleveraging, Charu Chanana, Saxo's chief investment strategist, wrote in a note Tuesday.

The issue isn't necessarily their fundamentals, but their strong performance and crowded ownership, which make them an obvious source of cash when leveraged investors need to sell quickly, Chanana wrote.

2. Bonds and rate-sensitive stocks could face a less obvious squeeze

Bonds and rate-sensitive stocks could come under pressure

Bonds are another channel through which the yen's rally could ripple through portfolios.

Japanese bonds have already been selling off, pushing the benchmark 10-year yield their highest level in three decades. Higher yields at home, coupled with a stronger yen, could give Japanese investors more incentive to bring money back from overseas.