Bank of America has reiterated a recommendation for investors to hold long positions in the U.S. dollar into the third quarter, maintaining a short position on the euro. The bank points to a combination of resilient U.S. economic momentum, anticipated further Federal Reserve tightening and ongoing investment related to artificial intelligence as the principal supports for the dollar.
In its latest outlook, the bank projects EUR/USD to decline to 1.12 in the third quarter and finish 2026 at 1.15, a downward revision from its earlier 1.20 year-end forecast. Strategists at the bank say their view is underpinned by an expectation of three Fed rate hikes this year, a scenario that would broaden interest rate differentials in favor of the U.S. currency.
The note highlights that a narrowing performance gap between the U.S. economy and other major economies has already bolstered the dollar and that further outperformance from the U.S. could add to those gains. Short-term factors that have supported growth this year - including tax refunds, wealth effects and the FIFA World Cup - are cited by the strategists as temporary contributors. Over a longer horizon, the bank continues to see AI-related investment as a durable source of economic support.
While lower energy prices are identified as a possible source of relief for other major economies, the analysts expect that benefit to become more visible next year rather than immediately. That caveat signals a view that some external supports to global growth may lag the U.S. cycle.
On the Japanese yen, Bank of America has abandoned a previously persistent bearish stance. The strategists now prefer selling CHF/JPY, pointing to improving balance-of-payments dynamics in Japan, firmer AI-driven export demand and an uptick in inward investment as reasons for the shift. This represents a material change in the bank's currency preferences for Japan-related crosses.
For investors looking at carry and cross-currency plays, the bank continues to favor selective carry trades, naming AUD/CHF and USD/CHF as preferred pairs. The strategists also note a seasonal pattern that typically becomes less helpful in August when foreign exchange volatility tends to rise, and they caution investors accordingly.
Looking further ahead, the team expects currency volatility to increase into the U.S. midterm elections later in the year. They say that GBP/USD implied volatility appears relatively inexpensive and could attract flows amid election-related uncertainty. More broadly, the strategists add that stronger U.S. growth combined with a more hawkish Fed could keep both the dollar and overall FX volatility elevated.
Among the bank's updated year-end forecasts, they list GBP/USD at 1.37, USD/JPY at 152, AUD/USD at 0.71 and NZD/USD at 0.59. The strategists retain a constructive medium-term outlook on the British pound as well as the Australian and New Zealand dollars.
What this means for markets
The bank's stance suggests continued upward pressure on the dollar should its forecasts materialize, with implications for cross-rate moves, carry trades and asset allocation decisions tied to currency-sensitive sectors. Technology and export-focused sectors that benefit from AI investment and improving trade dynamics are highlighted as areas connected to the macro drivers cited by the bank.