BofA says investors should stay long USD into Q3 By Investing.com

Bank of America stayed bullish on the U.S. dollar, calling for three Fed rate hikes this year and forecasting EUR/USD at 1.12 in Q3 before 1.15 by end-2026, versus a prior 1.20 view. It also raised year-end FX forecasts including GBP/USD at 1.37, USD/JPY at 152, AUD/USD at 0.71, and NZD/USD at 0.59, while shifting to selling CHF/JPY on improved balance-of-payments dynamics and AI-related export strength. The note highlights AI-driven investment as a continuing support for U.S. growth and warns that FX volatility could pick up into the U.S. midterm elections.

Analysis

The cleanest implication is not just a stronger dollar, but a wider cross-asset dispersion regime. If U.S. growth and rates stay comparatively tighter for another quarter or two, the market should keep rewarding U.S.-centric cash flows while penalizing foreign demand proxies, especially in sectors where revenue is local but funding is global. That argues for relative-value expressions over outright macro bets: the dollar’s upside is already partially priced, but the underappreciated trade is against currencies backed by lower carry, weaker external balances, or slower earnings revisions.

AI remains the second-order accelerant because it supports capex, imports of hardware, and balance-of-payments divergence all at once. That creates a subtle winner/loser split inside developed markets: countries that supply semiconductors, optics, power infrastructure, and data-center buildout should see better export terms, while energy importers may get some relief only with a lag. The yen call change is particularly important because it suggests the market may be approaching a point where Japan’s external accounts improve enough to compress downside tail risk in JPY, even if the near-term rate differential still favors USD.

Volatility looks mispriced relative to the event calendar. August seasonality and the U.S. election window increase the odds that FX becomes more jumpy than trend-like, so the best risk-adjusted setup is to own optionality rather than chase spot after the move. GBP vol stands out as cheap versus the potential policy/political sensitivity, while low-vol carry baskets remain vulnerable if the market shifts from a rates story to a risk-off story in late summer.

The contrarian view is that the consensus may be overconfident in linear dollar strength. If U.S. data merely cools from exceptional to normal, the dollar can stall quickly because positioning is already crowded and foreign policy rates have less room to disappoint than the Fed does to surprise hawkishly. That makes the next leg less about bullish USD beta and more about whether AI capex and election uncertainty can sustain a volatility premium without forcing a broader unwind in carry trades.

Key Decisions for Investors

• Stay long DXY vs EUR through the next 4-8 weeks, but express via options (call spreads) rather than spot; upside is incremental while downside from a softer U.S. print could be sharp.
• Initiate a tactical long USD/JPY position into the next two Fed prints with a tight stop; the trade works only if rate differentials stay dominant, so trim aggressively on any U.S. growth miss.
• Buy GBP/USD straddles or strangles into the election-risk window; implied volatility appears cheap relative to the likelihood of a repricing in political tail risk over the next 1-3 months.
• Prefer CHF/JPY shorts as a relative-value trade over broad USD longs; this captures improving Japanese external dynamics while avoiding full exposure to a U.S. macro reversal.
• Reduce exposure to low-vol carry baskets like AUD/CHF if spot vol starts to lift in August; the payoff is attractive only until volatility regime breaks, at which point drawdowns can compound quickly.