Dollar set for H2 2026 gains on AI, oil and rate views
Bank of America forecasts the US dollar will strengthen further in the second half of 2026, driven by a rare mix of AI-driven equity inflows, elevated oil prices, and an out-of-consensus call for steeper Federal Reserve rate hikes.
The US dollar is positioned for further appreciation in the second half of 2026, according to Bank of America. Having already climbed roughly 2.5% year-to-date against a basket of major currencies, the greenback faces a favorable tailwind of structural and macroeconomic forces. FX strategist Alex Cohen outlined three primary catalysts for this continued outperformance in a recent client note.
The most aggressive driver is a stark divergence between Bank of America's monetary policy forecast and broader market consensus. While traders currently price in just one 25-basis-point rate hike from the Federal Reserve this year, BofA anticipates three. A higher-for-longer interest rate environment adding up to 75 basis points of tightening would widen the yield gap between the US and other developed economies, drawing fixed-income capital toward the dollar.
Beyond monetary policy, unprecedented foreign demand for US technology exposure is forcing structural dollar buying. International investors purchasing shares in AI infrastructure builders like Nvidia (NVDA), Intel (INTC), and Broadcom (AVGO), or hyperscalers like Meta (META), Microsoft (MSFT), Amazon (AMZN), and Alphabet (GOOG, GOOGL), must first convert their local currencies. "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."
Geopolitical instability in the Middle East is adding a classic safe-haven bid to the currency. The ongoing war in Iran and the closure of the Strait of Hormuz have kept Brent and WTI crude futures up roughly 40% on the year despite a June pullback. Because oil is priced in dollars, foreign-exchange demand to secure energy supplies acts as a floor for the greenback. "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 noted.
For global portfolio managers and multinational corporates, the convergence of these factors suggests dollar strength is a durable trend rather than a temporary shock. The usual dynamic where geopolitical conflict weighs on equities has been overridden by the sheer scale of AI capital expenditure. Businesses with significant non-dollar revenue should carefully consider the implications of this triple threat—AI capital flows, sustained energy costs, and tighter Fed policy—when setting their hedging strategies for the rest of the year.
