Bank of America remains optimistic about the US dollar in the third quarter, based on the resilience of US economic growth, expectations that the Federal Reserve will raise interest rates again, as well as continued support from investments related to artificial intelligence.
The bank maintained its buy recommendation for the dollar and sell recommendation for the euro, and expects the EUR/USD pair to fall to 1.12 during the third quarter, before ending 2026 at 1.15, which is lower than its previous forecast of 1.20.
Strategic analysts expect three interest rate hikes by the Federal Reserve this year, which they believe will widen the interest rate gap in favor of the dollar.
They pointed out that the narrowing gap between US economic performance and the rest of the world has already supported the dollar, stressing that further gains are possible if the US economy continues to outperform.
The memo explained that temporary factors, including tax refunds, wealth effects, and the FIFA World Cup, contributed to supporting growth this year. In the long term, however, investments related to artificial intelligence are expected to remain a significant economic driver.
Lower energy prices may also help support other major economies, although analysts predict that this effect will become more apparent next year.
On another front, the bank revised its outlook for the Japanese yen, abandoning its long-held pessimistic stance. It now favors selling the CHF/JPY pair, citing improved balance of payments dynamics, rising AI-related exports, and increasing inward investment.
Regarding trading strategies, analysts continue to favor selective carrying trades, particularly in the AUD/CHF and USD/CHF pairs. They also cautioned that seasonal patterns become less supportive during August, when forex market volatility typically rises.
Looking ahead, the team anticipates increased currency volatility as the US midterm elections approach later this year, noting that the GBP/USD pair appears to be relatively low-cost and could benefit from election-related uncertainty.
The strategists added that the strength of US growth and the Federal Reserve's tightening stance could continue to support the dollar and foreign exchange market volatility more broadly.
Among the most notable updated year-end forecasts, the bank estimates GBP/USD at 1.37, USD/JPY at 1.52, AUD/USD at 0.71, and NZD/USD at 0.59. The bank also maintained its constructive medium-term outlook for the British pound and the Australian and New Zealand dollars.
