Bank of America forecasts US dollar strength on geopolitical risk and AI capital flows
The bank predicts three interest rate hikes by the Federal Reserve, a view that contrasts with market expectations, while highlighting the dollar’s role as a safe-haven asset amid Middle East tensions and AI-driven equity inflows.
Bank of America’s foreign exchange desk has forecast that the US dollar will strengthen significantly in the second half of 2026, citing a convergence of geopolitical instability, the artificial intelligence investment boom, and a persistent higher-for-longer interest rate environment. The outlook follows a strong first half of the year, during which the US dollar index appreciated approximately 2.5% against a basket of major currencies.
The bank’s analysis identifies the war in Iran and the subsequent closure of the Strait of Hormuz as key factors sustaining elevated oil prices. With Brent crude and US WTI crude futures still trading roughly 40% higher on the year, the desk argues that the necessity for foreign exchange to purchase dollar-denominated oil supports greenback demand. Additionally, the dollar is benefiting from its traditional status as a safe-haven currency during periods of heightened military tension in the Middle East.
Beyond commodity flows, the artificial intelligence sector is driving substantial capital inflows into US equities. Foreign investors seeking exposure to technology leaders such as Nvidia, Intel, and Broadcom, as well as hyperscalers like Microsoft, Meta, Amazon, and Alphabet, must convert their local currencies into dollars to execute these trades. Bank of America FX strategist Alex Cohen noted that the staggering capital expenditure outlook in the US ensures that the AI boom continues to provide a structural boost to the dollar.
Monetary policy expectations form the third pillar of the bank’s bullish case. Bank of America forecasts that the Federal Reserve will implement three 25-basis-point interest rate hikes in 2026, a projection described as well out-of-consensus compared to market pricing which anticipates only a single hike. Cohen indicated that if rates rise by 75 basis points, the resulting higher yields on dollar-denominated assets such as Treasurys and corporate debt would further attract global capital.
The bank suggests that these tailwinds are mutually reinforcing, with elevated oil prices and AI-driven investment potentially keeping inflationary pressures alive. This environment could limit the Federal Reserve’s ability to cut rates or even force further tightening, thereby widening interest rate differentials against other major economies. Cohen concluded that these concurrent themes add to bullish risks for the dollar, reflecting the US economy’s continued relative strength.
