Bank of America has adjusted its foreign exchange outlook to reflect the economic and market effects of the recent Middle East conflict, forecasting a near-term bout of U.S. dollar strength before a later rebound in the euro.
The bank's team of strategists, led in part by Adarsh Sinha, now anticipates continued dollar appreciation into the second quarter and has set a short-term EUR/USD target of 1.14. They also updated their view on USD/JPY to 1.60. These revisions follow a reassessment of global growth and energy supply assumptions in the wake of the conflict.
“Before the Middle East conflict, we forecast a meaningful USD downtrend to materialize from 2Q onward,” the strategists wrote, but they added that this view has been delayed as “improving growth prospects for the rest of the world… now seem unlikely… given the energy shock.”
The strategists noted that the U.S. economy has shown resilience, a factor they previously expected to be most relevant in the first quarter but which they now judge likely to extend into the second quarter as well. At the same time, they pointed to elevated energy prices as a drag on growth across major economies, naming the euro area, China and Japan as regions that will face constrained expansion. Those growth impacts in turn limit the scope for significant downward pressure on the dollar.
“The USD rally so far has of course priced this in to a degree, but upside risks remain if the Middle East conflict drags on, and perhaps even after it ends, as it will likely take time for energy supply to normalize,” the strategists added.
Against this backdrop, Bank of America said it is "penciling in USD strength against almost all currencies in 2Q," and warned that upside risks to the dollar are skewed higher if geopolitical tensions persist.
Despite the nearer term bias toward dollar strength, the bank retained a constructive view for EUR/USD by year-end. Its year-end EUR/USD target remains 1.20 but is conditional on a set of outcomes the strategists see as necessary for that rebound: no further Federal Reserve rate hikes, restoration of energy supplies toward normal levels, and a pickup in global growth.
Looking beyond macro drivers, the strategists highlighted several factors they expect to support a stronger euro in the second half of the year, including German growth acceleration, active FX hedging, and a relatively low bar for European Union reforms.
On other currencies, Bank of America said it is most constructive on the British pound following the May local elections, while retaining a cautious near-term stance. The bank also reiterated that it holds its most bearish view on the New Zealand dollar.
This updated foreign exchange outlook underscores how geopolitical events and resulting energy market shocks can defer previously anticipated currency trends, compressing the window for a transition away from greenback strength and shaping cross-market risk perceptions.