The US dollar (DX-Y.NYB) has had a strong start to the year. Driven by booming foreign demand for US tech exposure and expectations of higher-for-longer interest rates, the greenback has appreciated roughly 2.5% against a basket of other major currencies.
Bank of America believes the US currency has more room to run in the second half of 2026.
The bank's foreign exchange desk sees three primary drivers for dollar outperformance: conflict in the Middle East, the AI boom, and a higher-for-longer interest rate outlook.
First, the war in Iran and the closure of the Strait of Hormuz are set to keep geopolitical tensions high and oil prices higher. Even after a sharp decline in June, futures on Brent crude (BZ=F) and US WTI crude (CL=F) are still up roughly 40% on the year — and a new wave of conflict is driving them higher still.
Given that oil is priced in dollars, bids for the product are expected to support the greenback through foreign-exchange demand. The dollar is also well-positioned for traditional risk-off safe-haven purchases, FX strategist Alex Cohen said in a recent client note.
"At a minimum, we see the balance of risks in oil markets as at least a mitigating factor for potential USD downside, to the extent that oil finds a floor somewhere around pre-war levels," Cohen wrote.
Second, the dollar is set to benefit from the notable performance of US equities throughout the first half of the year — driven almost entirely by the AI boom, Cohen wrote. Where, in previous years, the scourge of war might have been expected to dim stock performance, the explosive rush to develop artificial intelligence has kept the wind in the sails of US equities, including among foreign investors.
For investors outside of the US looking to buy shares of the sellers of AI technology, such as Nvidia (NVDA), Intel (INTC), and Broadcom (AVGO), or the AI tech buyers —hyperscalers like Meta (META), Microsoft (MSFT), Amazon (AMZN), and Alphabet (GOOG, GOOGL) — they must sell their local currency to buy dollars, with which they can then use to purchase US equities, giving another boost to the greenback. "By any measure, the cap-ex outlook in the US is staggering, both outright and vis-à-vis the rest of the world," Cohen wrote. "The AI book is very much incomplete, but early chapters point to USD upside for now."
The final piece of the puzzle, Cohen said, is BofA's "well out-of-consensus call" on interest rates. Bank of America forecasts the Federal Reserve will hike interest rates by 25 basis points three times in 2026, whereas the market is only pricing in one hike. If rates do end up 75 basis points higher, Cohen argued, that's likely to be good for the dollar.