Bank of America Outlines Three Catalysts for a Stronger US Dollar in H2

Bank of America strategists have identified three potential themes that could collectively drive the U.S. dollar higher in the second half of the year: escalating geopolitical tensions, a hawkish Federal Reserve, and sustained heavy spending in the artificial intelligence sector.

Hawkish Fed and Geopolitical Risk

Bank of America holds a view that is "well out-of-consensus," projecting three more Federal Reserve rate hikes this year for a total of 75 basis points of additional tightening. This outlook sharply contrasts with current market pricing, which anticipates just 28 basis points of hikes, according to a note from BofA FX strategist Alex Cohen.

Cohen pointed to recent comments from Fed Chair Warsh to Congress reaffirming the central bank's commitment to its 2% inflation target, even following a soft June CPI report. The bank also highlighted the renewed correlation between the U.S. dollar and oil prices, which have rallied approximately 20% amid resurfacing tensions around the Strait of Hormuz.

AI Spending as a Dollar Positive

The burgeoning AI industry is seen as another significant tailwind for the dollar. BofA estimates that the top five U.S. hyperscalers could direct around $900 billion toward capital expenditures in 2027, dwarfing the estimated $220 billion combined spending from the top 25 non-U.S. firms. This U.S.-centric investment trend is a net positive for the currency.

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A June sentiment survey conducted by the bank found that 65% of respondents expect AI to have a net-positive impact on the dollar this year. Furthermore, Cohen noted that rising costs for AI components like semiconductors and electricity could reinforce a hawkish bias at the Fed as they run counter to easing broader inflation.

Market Outlook

While futures positioning for the U.S. dollar is near multi-decade highs, BofA suggests this may overstate how bullish investors are, citing its own sentiment surveys and options pricing. This could imply there is still room for the long-dollar trade to grow.

Taken together, Bank of America concluded that these three distinct themes are "collectively adding to bullish risks" for the U.S. dollar heading into the final months of the year.