US dollar set for a strong second half of the year, Bank of America says

The US dollar (DX-Y.NYB) has had a beardown commencement to the year. Driven by booming overseas request for US tech vulnerability and expectations of higher-for-longer involvement rates, the greenback has appreciated astir 2.5% against a handbasket of different large currencies.

Bank of America believes the US currency has much country to tally successful the 2nd fractional of 2026.

The bank's overseas speech table sees 3 superior drivers for dollar outperformance: struggle successful the Middle East, the AI boom, and a higher-for-longer involvement complaint outlook.

First, the warfare successful Iran and the closure of the Strait of Hormuz are acceptable to support geopolitical tensions precocious and lipid prices higher. Even aft a crisp diminution successful June, futures connected Brent crude (BZ=F) and US WTI crude (CL=F) are inactive up astir 40% connected the twelvemonth — and a caller question of struggle is driving them higher still.

Given that lipid is priced successful dollars, bids for the merchandise are expected to enactment the greenback done foreign-exchange demand. The dollar is besides well-positioned for accepted risk-off safe-haven purchases, FX strategist Alex Cohen said successful a caller lawsuit note.

"At a minimum, we spot the equilibrium of risks successful lipid markets arsenic astatine slightest a mitigating origin for imaginable USD downside, to the grade that lipid finds a level determination astir pre-war levels," Cohen wrote.

Second, the dollar is acceptable to payment from the notable show of US equities passim the archetypal fractional of the twelvemonth — driven astir wholly by the AI boom, Cohen wrote. Where, successful erstwhile years, the scourge of warfare mightiness person been expected to dim banal performance, the explosive unreserved to make artificial quality has kept the upwind successful the sails of US equities, including among overseas investors.

For investors extracurricular of the US looking to bargain shares of the sellers of AI technology, specified arsenic Nvidia (NVDA), Intel (INTC), and Broadcom (AVGO), oregon the AI tech buyers —hyperscalers similar Meta (META), Microsoft (MSFT), Amazon (AMZN), and Alphabet (GOOG, GOOGL) — they indispensable merchantability their section currency to bargain dollars, with which they tin past usage to acquisition US equities, giving different boost to the greenback.

"By immoderate measure, the cap-ex outlook successful the US is staggering, some outright and vis-à-vis the remainder of the world," Cohen wrote. "The AI publication is precise overmuch incomplete, but aboriginal chapters constituent to USD upside for now."

The last portion of the puzzle, Cohen said, is BofA's "well out-of-consensus call" connected involvement rates. Bank of America forecasts the Federal Reserve volition hike involvement rates by 25 ground points 3 times successful 2026, whereas the marketplace is lone pricing successful 1 hike. If rates bash extremity up 75 ground points higher, Cohen argued, that's apt to beryllium bully for the dollar.