Bank of America Forecasts Strong Dollar Performance in H2 2026 Driven by Three Key Catalysts

Bank of America projects the US dollar will maintain its robust momentum into the second half of 2026, driven by a triad of powerful forces: Middle Eastern conflict, the artificial intelligence boom, and a higher-for-longer interest rate outlook. Having appreciated roughly 2.5% against a basket of major currencies since the start of the year, the greenback is poised for further gains as foreign demand for tech exposure and safe-haven assets intensifies.

Geopolitical Tensions Fueling Oil and Demand

The bank's foreign exchange desk identifies the war in Iran and the closure of the Strait of Hormuz as critical factors keeping geopolitical tensions—and oil prices—elevated, which in turn supports the greenback.

■Brent crude (BZ=F) and US WTI crude (CL=F) futures are still up approximately 40% on the year despite a sharp decline in June.

■As oil is priced in dollars, bids for the commodity are expected to support the greenback through foreign-exchange demand.

■FX strategist Alex Cohen notes the dollar is well-positioned for traditional risk-off safe-haven purchases.

The AI Boom and Capital Flight to US Equities

The dollar is set to benefit significantly from the stellar performance of US equities, driven almost entirely by the explosive rush to develop artificial intelligence, creating a surge in capital inflows.

■Foreign investors looking to buy shares in AI technology sellers like Nvidia (NVDA), Intel (INTC), and Broadcom (AVGO) must sell local currency to buy dollars.

■Hyperscalers such as Meta (META), Microsoft (MSFT), Amazon (AMZN), and Alphabet (GOOG, GOOGL) are driving massive capital expenditures.

■Cohen describes the US capital expenditure outlook as "staggering" both outright and compared to the rest of the world.

Defying the Consensus on Interest Rates

The final pillar of the bank's forecast is a bold call on interest rates that diverges sharply from market expectations.

■Bank of America forecasts the Federal Reserve will hike interest rates by 25 basis points three times in 2026.

■This contrasts with the market pricing in just a single hike.

■If rates end up 75 basis points higher, Cohen argues this will likely act as a strong tailwind for the dollar.

A stronger dollar combined with a blockage in the Strait of Hormuz could send freight costs and insurance premiums soaring. As supply shocks in oil markets emerge, we anticipate increased volatility in the Baltic Dry Index (BDI). For commodity importers, this creates a double-edged sword: rising costs from both currency fluctuations and logistics. Supply chain managers must brace for inflationary pressures that could reshape global trade routes in the coming quarters.