BofA says investors should stay long USD into Q3
Bank of America remains bullish on the U.S. dollar into the third quarter, citing resilient U.S. economic growth, expectations for additional Federal Reserve rate hikes, and continued support from artificial intelligence-driven investment.
The bank maintained its recommendation to stay long the dollar and short the euro. It forecasts EUR/USD to fall to 1.12 in the third quarter before ending 2026 at 1.15, down from its previous forecast of 1.20.
The strategists expect three Fed rate hikes this year, which they believe will widen interest rate differentials in favor of the greenback.
They said the narrowing gap between U.S. economic performance and the rest of the world has already supported the dollar. Additional gains are possible if the U.S. economy continues to outperform.
The note said temporary factors such as tax refunds, wealth effects, and the FIFA World Cup have supported growth this year. Over the longer term, AI-related investment is expected to remain an important economic driver.
Lower energy prices could also provide support to other major economies, though the analysts expect that benefit to become more evident next year.
The bank also revised its outlook on the Japanese yen, abandoning its long-held bearish stance. It now favors selling CHF/JPY, citing improving balance-of-payments dynamics, stronger AI-related exports, and rising inward investment.
On trading strategies, the analysts continue to favor selective carry trades, particularly AUD/CHF and USD/CHF. They also cautioned that seasonal patterns become less supportive during August, when foreign exchange volatility typically increases.
Looking ahead, the team expects currency volatility to rise into the U.S. midterm elections later this year. It said GBP/USD volatility appears relatively inexpensive and could benefit from election-related uncertainty.
The strategists added that stronger U.S. growth and a more hawkish Federal Reserve could continue supporting both the dollar and broader foreign exchange volatility.
Among the updated year-end forecasts, the bank projects GBP/USD at 1.37, USD/JPY at 152, AUD/USD at 0.71, and NZD/USD at 0.59. It also maintained a constructive medium-term view on sterling and the Australian and New Zealand dollars.
