Bank of America Stays Bullish on the U.S. Dollar, Sees EUR/USD Falling to 1.12
Bank of America has maintained its bullish outlook for the U.S. dollar in the third quarter of 2026, arguing that the strength of the U.S. economy, the Federal Reserve’s continued hawkish stance, and the ongoing surge in artificial intelligence-related investment will continue to support the U.S. currency in the months ahead.
The outlook was outlined in a recent research note reported by Investing.com, in which the bank advised investors to maintain long positions in the U.S. dollar while continuing to short the euro. Bank of America expects the EUR/USD exchange rate to decline to 1.12 during the third quarter before ending 2026 near 1.15.
The forecast comes as the U.S. dollar continues to hold on to recent gains, supported by the strength of the U.S. Dollar Index (DXY) and persistent market expectations that the Federal Reserve will keep monetary policy restrictive for longer.
📊 At a Glance
- Bank of America reaffirmed its recommendation to remain long the U.S. dollar during the third quarter.
- The bank expects EUR/USD to fall to 1.12 before ending 2026 around 1.15.
- Analysts forecast three additional U.S. interest rate increases this year.
- Artificial intelligence investment is expected to remain a key driver of U.S. economic growth.
- The bank expects the U.S. dollar to outperform most major currencies during the second half of 2026.
Live U.S. Dollar Index (DXY)
The U.S. Dollar Index is trading near its highest levels in several months, reflecting market expectations that the Federal Reserve will maintain restrictive monetary policy. The index serves as the benchmark for measuring the U.S. dollar against a basket of six major currencies and is closely watched by investors assessing trends in gold, oil, and global foreign exchange markets.
- Measures the dollar against six major global currencies.
- Directly influences gold, oil, and commodity prices.
- Reflects investor expectations for Federal Reserve policy.
- Serves as one of the world’s leading foreign exchange benchmarks.
- Maintain long positions in the U.S. dollar during the third quarter.
- Continue recommending short euro positions.
- Forecast EUR/USD to decline to 1.12 during Q3.
- Expect EUR/USD to finish 2026 near 1.15.
- Project three additional Federal Reserve rate increases this year.
- Identify artificial intelligence investment as a major driver of the U.S. economy.
Bank of America analysts argue that markets continue to underestimate the resilience of the U.S. economy relative to other major economies, leaving room for additional dollar gains if incoming economic data continues to outperform expectations.
Why Bank of America Remains Bullish on the U.S. Dollar
According to the research note, the bank’s optimistic outlook is supported by several economic and financial factors, including continued labor market strength, resilient consumer spending, rising capital investment, and expectations that interest rates will remain elevated.
Bank of America expects the Federal Reserve to deliver three additional interest rate increases during 2026, widening yield differentials between the United States and other advanced economies and further increasing the attractiveness of dollar-denominated assets.
The bank also believes that continued growth in artificial intelligence and the substantial investment associated with the sector will provide long-term support for the U.S. economy, directly benefiting the dollar in global currency markets.
Artificial Intelligence and the Federal Reserve: Why the Bank Expects the Dollar to Stay Strong
Bank of America does not attribute the strength of the U.S. dollar to a single factor. Instead, it argues that several economic drivers are working in the same direction, including continued resilience in the U.S. economy, a restrictive monetary policy stance, and large-scale investment in the artificial intelligence sector.
The bank’s analysts noted that while the gap between U.S. economic performance and that of other advanced economies has narrowed in recent months, the United States continues to deliver more resilient growth, supporting continued capital inflows into dollar-denominated assets.
The report also highlighted several temporary factors that supported economic activity this year, including tax refunds, wealth effects from higher asset prices, and the economic boost associated with hosting the FIFA World Cup 2026.
However, Bank of America believes the most significant medium-term growth driver remains investment in artificial intelligence, which is expected to attract substantial capital to the U.S. economy while improving productivity across multiple industries over the coming years.
- Strong U.S. economic growth.
- Expectations of additional interest rate increases.
- Higher U.S. Treasury yields.
- Large-scale investment in artificial intelligence.
- Continued capital inflows into the United States.
- A resilient labor market and consumer spending.
Updated Outlook for the Euro, Yen, and Major Currencies
In addition to its constructive view on the U.S. dollar, Bank of America lowered its forecast for EUR/USD, expecting the currency pair to decline to 1.12 during the third quarter of 2026 before ending the year near 1.15, compared with its previous projection of 1.20.
The bank believes that widening interest rate differentials between the United States and Europe are likely to keep pressure on the euro, particularly if the U.S. economy continues to outperform the euro area’s major economies.
Meanwhile, Bank of America revised its long-held bearish stance on the Japanese yen, citing improvements in Japan’s balance of payments, stronger artificial intelligence-related exports, and increasing inbound investment.
The bank also recommended selling CHF/JPY, arguing that improving economic fundamentals in Japan could gradually strengthen the yen over time.
Regarding trading strategies, analysts continue to favor selective carry trade positions, particularly AUD/CHF and USD/CHF, while warning that seasonal patterns become less supportive in August, when foreign exchange market volatility typically increases.
What Do Bank of America’s Forecasts Mean for Investors in the Second Half of 2026?
The research note suggests that investors could face a financial environment very different from expectations at the beginning of the year. Rather than anticipating a weaker dollar, Bank of America now believes that continued U.S. economic strength and a restrictive Federal Reserve policy are likely to keep the U.S. currency in a position of relative strength throughout the coming months.
That outlook implies investors in the foreign exchange market may continue to favor dollar-denominated assets, while other major currencies could remain under pressure if interest rate differentials between the United States and other advanced economies continue to widen.
At the same time, the bank believes lower energy prices could gradually support European and Asian economies next year, although that benefit is unlikely to offset the United States’ current economic advantage.
- EUR/USD: 1.15
- GBP/USD: 1.37
- USD/JPY: 152
- AUD/USD: 0.71
- NZD/USD: 0.59
- Maintains a constructive outlook on the U.S. dollar.
📊 Bank of America’s Updated Major Currency Forecasts Through the End of 2026
| Currency Pair | Previous Forecast | Updated Forecast | Outlook |
|---|---|---|---|
| EUR/USD | 1.20 | 1.15 | Expected decline in the euro |
| GBP/USD | — | 1.37 | Stable with a constructive bias |
| USD/JPY | — | 152 | Stronger U.S. dollar versus the yen |
| AUD/USD | — | 0.71 | Stable |
| NZD/USD | — | 0.59 | Stable |
Source: Bank of America Global FX Strategy Outlook for the third quarter and year-end 2026.
U.S. Midterm Elections Could Trigger Greater Currency Market Volatility
Despite its positive outlook for the U.S. dollar, Bank of America warned that the second half of the year could bring a significant increase in foreign exchange market volatility as the United States approaches its midterm elections. The bank said the political backdrop may prompt investors to reassess their positions in major currencies.
The report also noted that GBP/USD appears relatively inexpensive from a volatility pricing perspective and could benefit from heightened political uncertainty in the United States over the coming months.
In addition, the bank cautioned that seasonal trends become less supportive during August, a month that has historically been characterized by higher currency market volatility and lower liquidity, making foreign exchange markets more sensitive to economic data releases and geopolitical developments.
Could Artificial Intelligence Reshape the Global Currency Market?
One of the report’s most notable themes is Bank of America’s view that artificial intelligence should be viewed as a long-term macroeconomic driver rather than simply a rapidly growing investment sector.
The bank believes that heavy investment in data centers, semiconductor manufacturing, and digital infrastructure is already improving productivity and capital investment across the United States. According to the report, these developments could provide the U.S. economy with an additional competitive advantage over other advanced economies while strengthening global demand for the U.S. dollar.
- Upcoming Federal Reserve policy decisions.
- U.S. inflation data.
- Labor market developments.
- U.S. economic performance relative to Europe.
- Artificial intelligence-related investment.
- U.S. midterm elections.
- The U.S. dollar’s performance against major currencies.
Bank of America’s outlook extends well beyond the foreign exchange market. Because the U.S. dollar remains the world’s primary reserve currency, changes in its trajectory have broad implications across global financial markets.
- Gold: A stronger dollar typically puts downward pressure on gold prices and reduces the metal’s appeal as a safe-haven asset.
- Oil: Since crude oil is priced in U.S. dollars, movements in the currency directly affect energy prices and global trade.
- Equity Markets: Changes in the dollar and interest rates influence corporate valuations and international capital flows.
- Foreign Exchange Markets: Dollar strength reshapes trends across major currency pairs, including the euro, yen, and British pound.
- Global Economy: A stronger dollar affects import costs, financing conditions, and international trade, particularly across emerging markets.
Will the U.S. Dollar Continue to Lead Global Markets?
Bank of America’s latest outlook signals a meaningful shift in the view of one of the world’s largest investment banks toward global currency markets. The bank expects the U.S. dollar to remain strong throughout the third quarter, supported by robust U.S. economic growth, a hawkish Federal Reserve, and accelerating investment tied to artificial intelligence.
At the same time, Bank of America expects continued pressure on the euro after lowering its EUR/USD forecasts, while adopting a more constructive stance on the Japanese yen following improvements in the country’s economic fundamentals.
“Bank of America believes that the strength of the U.S. economy, the Federal Reserve’s restrictive monetary policy, and continued investment in artificial intelligence could keep the U.S. dollar in a leading position throughout the second half of 2026.”
— Key conclusion from Bank of America’s latest global currency outlook
With interest rate expectations, resilient U.S. economic growth, and expanding investment in artificial intelligence reinforcing one another, the U.S. dollar appears to be entering the second half of 2026 with multiple structural advantages. Investors will now be watching closely to determine whether these factors are sufficient to keep the greenback at the forefront of global foreign exchange markets through year-end.
