The US greenback (DX-Y.NYB) has had a robust begin to the yr. Pushed by booming international demand for US tech publicity and expectations of higher-for-longer rates of interest, the buck has appreciated roughly 2.5% in opposition to a basket of different main currencies.
Financial institution of America believes the US foreign money has extra room to run within the second half of 2026.
The financial institution’s international trade desk sees three major drivers for greenback outperformance: battle within the Center East, the AI increase, and a higher-for-longer rate of interest outlook.
First, the battle in Iran and the closure of the Strait of Hormuz are set to maintain geopolitical tensions excessive and oil costs increased. Even after a pointy decline in June, futures on Brent crude (BZ=F) and US WTI crude (CL=F) are nonetheless up roughly 40% on the yr — and a brand new wave of battle is driving them increased nonetheless.
On condition that oil is priced in {dollars}, bids for the product are anticipated to assist the buck via foreign-exchange demand. The greenback can be well-positioned for conventional risk-off safe-haven purchases, FX strategist Alex Cohen mentioned in a latest shopper observe.
“At a minimal, we see the stability of dangers in oil markets as at the very least a mitigating issue for potential USD draw back, to the extent that oil finds a ground someplace round pre-war ranges,” Cohen wrote.
Second, the greenback is about to profit from the notable efficiency of US equities all through the primary half of the yr — pushed virtually totally by the AI increase, Cohen wrote. The place, in earlier years, the scourge of battle may need been anticipated to dim inventory efficiency, the explosive rush to develop synthetic intelligence has stored the wind within the sails of US equities, together with amongst international buyers.
For buyers exterior of the US trying to purchase shares of the sellers of AI know-how, corresponding to Nvidia (NVDA), Intel (INTC), and Broadcom (AVGO), or the AI tech consumers —hyperscalers like Meta (META), Microsoft (MSFT), Amazon (AMZN), and Alphabet (GOOG, GOOGL) — they have to promote their native foreign money to purchase {dollars}, with which they will then use to buy US equities, giving one other enhance to the buck.
“By any measure, the cap-ex outlook within the US is staggering, each outright and vis-à-vis the remainder of the world,” Cohen wrote. “The AI e-book may be very a lot incomplete, however early chapters level to USD upside for now.”
The ultimate piece of the puzzle, Cohen mentioned, is BofA’s “properly out-of-consensus name” on rates of interest. Financial institution of America forecasts the Federal Reserve will hike rates of interest by 25 foundation factors 3 times in 2026, whereas the market is just pricing in a single hike. If charges do find yourself 75 foundation factors increased, Cohen argued, that is prone to be good for the greenback.
