Bank of America Expects Continued U.S. Dollar Strength
Bank of America anticipates that the U.S. dollar will 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 foreign exchange markets.
Updated FX Forecasts Point to Stronger Dollar
The bank has revised its foreign exchange (FX) outlook to reflect ongoing dollar strength. It now forecasts the EUR/USD pair to reach 1.14 and USD/JPY to rise to 160 by the end of the second quarter, signaling confidence in continued USD momentum.
Energy Prices and Geopolitical Risks Boost USD
Rising oil prices and uncertainty linked to Middle East tensions have played a key role in strengthening the dollar. Markets are reassessing the duration and impact of the energy shock, with higher energy costs contributing to inflationary pressures and supporting the USD.
According to FX strategists led by John Shin, increased energy prices have pushed the dollar higher, particularly as markets anticipate more hawkish central bank policies aimed at controlling inflation, including actions from the Federal Reserve.
Impact of Iran Conflict on Currency Markets
The ongoing conflict involving Iran has reshaped both short-term and medium-term currency outlooks. Bank of America sees further potential for dollar appreciation, especially against currencies from economies that rely heavily on energy imports.
The bank’s commodities team expects Brent crude oil to average close to $80 in 2026, reinforcing the broader inflationary environment that tends to favor a stronger dollar.
Central Bank Expectations Shift
Market expectations around interest rates have also changed significantly. Investors are now pricing in around 10 basis points of Federal Reserve tightening in 2026, while other G10 central banks are expected to implement two to four rate hikes.
Strategists emphasize that whether these anticipated rate increases materialize will play a crucial role in determining currency movements through the middle of the year.
Outlook: Strength Now, Weakness Later
Bank of America has effectively extended its timeline for dollar strength from the first quarter into the second quarter. However, the broader outlook remains unchanged, with expectations for gradual USD weakening later in 2026 as market conditions stabilize.
The bank projects EUR/USD could rise to 1.20 by the end of 2026, reflecting a longer-term bearish stance on the dollar.
Key Risks to the Dollar Outlook
The future path of energy markets remains the primary risk factor. Prolonged disruptions could drive further gains in the dollar, while a faster resolution of geopolitical tensions may lead to a reversal of recent gains as risk premiums fade.
