Bank of America reaffirmed a tactical recommendation to hold long positions in the U.S. dollar versus the British pound and the Canadian dollar, despite what its strategists described as disappointing recent dollar behaviour.
Adarsh Sinha and Oliver Levingston, strategists at the bank, noted that the dollar's recent price action had been "far from encouraging" - largely contained within a trading range and failing to reflect underlying fundamentals. Still, they kept their guidance to stay long the dollar against both the pound and the loonie.
The strategists pointed to several factors behind the dollar's limp performance. The greenback underperformed even as oil prices recovered; earlier in the month the dollar had weakened alongside a slide in energy prices sparked by optimism around the Middle East conflict. That initial sell-off, and the subsequent rebound in oil, did not translate into a stronger dollar index.
BofA highlighted that U.S. economic surprises have been the most positive relative to the rest of the world since 2023, yet this outperformance has not produced the usual lift for the dollar. The bank attributed part of the disconnect to transitory influences - month-end rebalancing flows and what it judged to be likely sizeable foreign exchange intervention by Japan, both of which weighed on the broader dollar complex. At the same time, buoyant equity markets have supported higher-beta currencies, diminishing demand for the dollar.
Beyond those episodic drivers, the bank argued the primary explanation is that market participants see a high threshold for the Federal Reserve to resume raising interest rates. That perception has created a pronounced gap between robust U.S. economic data and the rate differential dynamics that would normally move in step.
BofA's rates team estimated markets could put roughly a 50% probability on a Fed rate hike by year-end, and potentially price in up to 1.5 hikes if incoming data - particularly labour market indicators - remain resilient. By contrast, other central banks may have less flexibility to tighten monetary policy if growth softens abroad.
"The balance of risks is for wider U.S. 2y rate differentials from here," the strategists wrote, adding that this divergence should become clearer as second-quarter economic data further delineates the U.S. outlook from that of other economies.
The bank also rejected two alternative explanations for the dollar's softness. It said neither a rising U.S. fiscal risk premium nor improving sentiment toward China provided convincing evidence of materially weighing on the currency.
While recent market moves have obscured the link between stronger U.S. economic surprises and the dollar, BofA maintained its tactical bullish stance against the pound and the Canadian dollar, citing the potential for rate-differential expansion as data flow clarifies the global picture.