BIS Report: Leveraged Money Flows; The Main Driver of Exchange Rate Volatility

In its latest annual economic report released in late June 2026, the Bank for International Settlements (BIS) sounded the alarm regarding the destructive impact of leveraged money flows on currency markets. The report emphasizes that the growing role of non-bank financial institutions (NBFI), particularly hedge funds, has caused currency market volatility to move beyond the control of central banks [1].

Mechanism of Financial Leverage Impact on the Currency Market According to BIS analysis, hedge funds direct massive volumes of capital into currency markets using high-leverage trading strategies. These flows, which are often short-term and speculative, can significantly strengthen or weaken a currency in a short period. Recent reports show that these funds have doubled market sensitivity to interest rate changes by using 'Repo' markets to finance their positions [2]. This has caused even the smallest economic signals to trigger intense chain reactions in exchange rates.

A New Link Between Sovereign Debt and Financial Stability One of the key points of the 2026 report is the identification of a 'new fiscal-sovereign nexus.' The BIS explains how high levels of public debt in advanced economies have intersected with the leveraged activities of hedge funds. When volatility increases in the government bond market, these funds are forced to sell currency assets to cover their losses, which directly impacts exchange rates [1]. This vicious cycle can lead to 'market dysfunction,' where prices no longer reflect economic realities.

Serious Challenges for Emerging Economies The International Monetary Fund (IMF) has also warned in similar analyses that emerging economies suffer the most from these leveraged flows [3]. With the return of volatility to global markets due to geopolitical tensions in early 2026, 'Carry Trade' strategies—where investors borrow at low interest rates to invest in high-yield currencies—are rapidly returning and reversing. This sudden capital flight has placed unprecedented pressure on the national currencies of developing countries [2].

Policy Recommendations for Central Banks The BIS concludes its report by emphasizing that central banks must maintain stricter oversight of the non-bank financial sector. It is suggested that new tools for managing liquidity in emergencies be designed to prevent sudden currency devaluations. Furthermore, international coordination to limit financial leverage in currency transactions has been presented as a necessity for maintaining global financial stability in 2026 [1].