Bank of America Sees Continued Strength in U.S. Dollar
Bank of America expects the U.S. dollar to remain strong in the near term, supported by elevated energy prices and shifting expectations around global central bank policies. These factors continue to drive demand for the greenback across currency markets.
Updated FX Forecasts Signal Dollar Upside
The bank has revised its foreign exchange outlook to reflect stronger short-term dollar performance. It now projects EUR/USD to reach 1.14 and USD/JPY to rise to 160 by the end of the second quarter.
Energy Shock and Geopolitical Risks Support USD
Markets are reassessing the scale and duration of the Middle East energy shock, with persistently high oil prices and geopolitical uncertainty boosting the dollar’s appeal.
According to BofA strategists led by John Shin, rising energy costs have reinforced expectations of more hawkish central bank policies, particularly from the Federal Reserve, which continues to focus on inflation risks.
Iran Conflict Reshapes Currency Outlook
The ongoing Iran conflict has significantly altered both the short- and medium-term outlook for global currencies. Bank of America believes there is still room for further dollar appreciation, especially against currencies of countries heavily dependent on energy imports.
The bank’s commodities team also expects Brent crude to average close to $80 in 2026, further supporting inflationary pressures.
Shifting Central Bank Expectations Drive FX Markets
Expectations around monetary policy have shifted notably. Markets are now pricing in approximately 10 basis points of tightening by the Federal Reserve in 2026, while other G10 central banks are expected to deliver two to four rate hikes.
Strategists noted that whether these rate hikes materialize will play a crucial role in determining currency market direction in the coming months.
Dollar Strength Extended Into Q2
Bank of America has effectively extended its timeline for dollar strength from the first quarter into the second quarter, reflecting ongoing macroeconomic and geopolitical developments.
Longer-Term Outlook Points to Dollar Weakness
Despite the near-term bullish stance, BofA maintains a broader view that the U.S. dollar will gradually weaken later in 2026. This outlook depends on a normalization in energy markets and a reduction in geopolitical tensions.
The bank forecasts EUR/USD rising to 1.20 by the end of 2026, signaling a longer-term shift away from dollar dominance.
Key Risks to the Outlook
The future direction of the dollar remains closely tied to developments in global energy markets. A prolonged energy shock could drive further upside for the dollar, while a quicker resolution may lead to a reversal of recent gains as geopolitical risk premiums fade.
