Bank of America Maintains Bullish Outlook on the U.S. Dollar
Bank of America (BofA) is encouraging investors to remain tactically bullish on the U.S. dollar, even as the currency has shown weak and inconsistent performance in recent weeks.
Weak Price Action Fails to Change Strategy
The bank noted that recent price movements in the dollar have been “far from encouraging,” with the currency trading within a narrow range and failing to reflect strong underlying fundamentals. Despite this, BofA strategists Adarsh Sinha and Oliver Levingston continue to recommend long positions on the dollar, particularly against the British pound and the Canadian dollar.
Dollar Lags Despite Strong Fundamentals
The U.S. dollar has struggled to respond to improving macroeconomic conditions. It did not benefit from the recent rebound in oil prices after previously declining when energy markets weakened amid easing geopolitical tensions in the Middle East.
At the same time, U.S. economic data has been outperforming global peers at the strongest pace since 2023. However, this positive trend has not translated into gains for the dollar index.
Temporary Factors Weigh on the Dollar
BofA attributed part of the dollar’s weakness to temporary influences, including month-end portfolio rebalancing and potential foreign exchange intervention by Japan. These factors have added pressure on the broader dollar market.
Additionally, strong equity market performance has supported higher-risk currencies, further limiting demand for the U.S. dollar.
Federal Reserve Expectations Create Market Disconnect
According to BofA, the primary reason behind the dollar’s muted reaction lies in market expectations surrounding the Federal Reserve. Investors currently believe the threshold for additional interest rate hikes is relatively high.
This has created a disconnect between strong U.S. economic data and interest rate differentials, which would typically move in alignment.
Potential for Rate Hikes Could Support USD
BofA’s rates team estimates that markets could begin pricing in around a 50% probability of a Fed rate hike by the end of the year. In a more bullish scenario, up to 1.5 rate hikes could be expected if economic data—particularly from the labor market—remains strong.
Meanwhile, other global central banks may have limited capacity to tighten monetary policy if economic growth weakens outside the United States.
Divergence Expected to Favor the Dollar
The bank expects U.S. two-year yield differentials to widen further, a trend that could become more pronounced as second-quarter economic data highlights the divergence between the U.S. economy and global counterparts.
Alternative Explanations Dismissed
BofA also dismissed other commonly cited reasons for the dollar’s recent weakness, such as rising U.S. fiscal risk concerns and improving sentiment toward China. The bank stated that neither factor has provided sufficient evidence to significantly impact the currency.
