Bank of America says there are three principal dynamics that could push the U.S. dollar higher in the second half of the year - intensifying tensions in the Middle East that have pushed oil prices up, a Federal Reserve that may remain more hawkish than markets currently expect, and sustained heavy spending by U.S. AI hyperscalers.
Alex Cohen, the bank’s FX strategist, points to an approximate 20% rally in oil from its post-ceasefire trough as evidence of the geopolitical pressure that has returned to markets amid renewed concerns around the Strait of Hormuz. Cohen highlighted a sizeable net-short position among market participants combined with low inventories, arguing that this setup leaves crude with a "higher hurdle for downside moves" than for further gains.
According to Cohen, the dollar’s historical correlation with oil weakened in late June and early July but has since reasserted itself. He says this reconnection is a reminder that in the current market environment moves in oil prices have a tendency to influence the dollar.
On monetary policy, Bank of America holds a markedly out-of-consensus view. The bank expects three additional Federal Reserve rate increases this year - in September, October and December - amounting to 75 basis points of tightening in total. That contrasts with market pricing, which reflects only 28 basis points of expected tightening. Cohen noted comments by Fed Chair Warsh to Congress that he was "here to double down on the Fed’s 2% inflation target," remarks made even after a soft June CPI reading.
Cohen also observes that real rate differentials have widened in the dollar’s favor despite the softer inflation print, a development he views as another factor that mitigates downside pressure on the currency.
AI-related capital spending is the third theme Bank of America highlights as supportive for the dollar. The bank cites estimates indicating that the top five U.S. hyperscalers could spend around $900 billion in 2027, compared with roughly $220 billion combined for the top 25 non-U.S. firms. BofA’s June sentiment survey found that 65% of respondents expect AI to have a net-positive impact on the dollar this year, while 12% view it as negative.
Cohen added that the cost components tied to AI deployment - including semiconductors, memory and electricity - are rising even as broader inflation measures moderate. Those rising AI-related costs could reinforce a hawkish tilt at the Fed, he said.
Despite these supportive themes, Bank of America also notes that positioning in futures markets shows the dollar near multi-decade highs, and that such positioning may overstate how bullish investors truly are. The bank points to its own sentiment surveys and options pricing as indicators that futures positioning could be exaggerating actual bullish conviction.
Taken together, the bank concludes that the three themes are "collectively adding to bullish risks" for the dollar heading into the second half of the year. The analysis underscores links across geopolitics, energy markets, monetary policy expectations and technology-driven capital expenditure in shaping FX dynamics.
What this means for markets
- Energy markets - Rising oil amid tighter positioning and inventories can transmit to a stronger dollar.
- Fixed income and rates - A more hawkish Fed path would likely support higher real rates in the U.S., favoring the dollar.
- Technology and capital goods - Heavy AI capex by U.S. hyperscalers implies sustained demand for semiconductors, memory and electricity, with potential implications for related supply chains and pricing.