BofA sees 3 potential bullish USD themes into H2
Bank of America says three themes could drive the dollar higher in the second half of the year: escalating Middle East tensions, a more hawkish Federal Reserve than markets expect, and continued heavy spending by AI hyperscalers.
Intelligence analysis by Llama
Bank of America's FX strategist Alex Cohen notes that escalating Middle East tensions, a more hawkish Federal Reserve, and continued heavy spending by AI hyperscalers could drive the dollar higher in the second half of the year.
Imagine you're on a boat in a stormy sea. The boat is the US dollar, and the storm is the Middle East tensions and the Federal Reserve's decisions. If the boat is driven by strong winds and a skilled captain, it will sail smoothly and reach its destination safely. That's what Bank of America's FX strategist Alex Cohen is saying - the US dollar will be strong and sail smoothly if the three themes he mentioned come together.
Analysis
A $60B Vote of Confidence
Bank of America's FX strategist Alex Cohen notes that escalating Middle East tensions, a more hawkish Federal Reserve, and continued heavy spending by AI hyperscalers could drive the dollar higher in the second half of the year. The bank's call for three more Fed rate hikes this year, totaling 75 basis points of tightening, is well out of consensus with market pricing of just 28 basis points. This hawkish stance is supported by Fed Chair Warsh's recent comments to Congress that he was 'here to double down on the Fed's 2% inflation target,' even after a soft June CPI report. Real rate differentials have widened in the dollar's favor despite the soft inflation print, which Cohen views as 'another mitigating downside USD factor.'
Why Cursor?
Cohen also notes that AI spending has become a net-positive for the USD, citing capital expenditure estimates showing 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 own June sentiment survey found 65% of respondents expect AI to have a net-positive impact on the dollar this year, versus just 12% who see it as a negative. He also noted that AI-related costs, including semiconductors, memory and electricity, continue to rise even as broader inflation pressures ease, which could reinforce a hawkish Fed bias.
The Road Ahead
Cohen said current dollar positioning in futures markets, despite sitting near multi-decade highs, may overstate how bullish investors actually are, based on BofA's own sentiment surveys and options pricing. Taken together, the bank concluded the three themes are 'collectively adding to bullish risks' for the dollar heading into the second half of the year.
Key points
- Bank of America's FX strategist Alex Cohen notes that escalating Middle East tensions, a more hawkish Federal Reserve, and continued heavy spending by AI hyperscalers could drive the dollar higher in the second half of the year.
- The bank's call for three more Fed rate hikes this year, totaling 75 basis points of tightening, is well out of consensus with market pricing of just 28 basis points.
- AI spending has become a net-positive for the USD, citing capital expenditure estimates showing the top five U.S. hyperscalers could spend around $900 billion in 2027.
If the three themes come together, the US dollar could continue to rise, driven by escalating Middle East tensions, a more hawkish Federal Reserve, and continued heavy spending by AI hyperscalers.
However, if the three themes do not come together, the US dollar could face downward pressure, driven by a less hawkish Federal Reserve, decreased AI spending, and a decline in Middle East tensions.