Bank of America expects the US dollar to continue strengthening in the second quarter.

Investing.com - Bank of America expects that due to high energy prices and changing central bank expectations continuing to drive demand for the US dollar, the dollar will remain strong in the near term.

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The bank stated that it has revised its forex forecasts to reflect the “recent continued strength of the dollar,” now expecting the EUR/USD to reach 1.14 by the end of Q2, and USD/JPY to reach 160.

This comes as the market re-evaluates the duration and impact of the Middle East energy shock, with high oil prices and ongoing uncertainty helping to push the dollar higher.

Foreign exchange strategists led by John Shin said in a report: “Rising energy prices have helped boost the dollar, especially as market expectations for more hawkish, inflation-focused actions from central banks, including the Federal Reserve, have increased.”

The Iran conflict has changed the near- and medium-term outlook for currencies. Bank of America believes the dollar still has room to appreciate further, especially against currencies of economies more dependent on imported energy. The bank’s commodities team currently expects the average price of Brent crude to approach $80 in 2026, reinforcing inflationary pressures.

Meanwhile, central bank pricing has shifted significantly. The market now expects the Federal Reserve to raise interest rates by about 10 basis points by 2026, while other G10 central banks are shifting toward expecting 2 to 4 rate hikes.

Strategists wrote: “Whether these rate hike expectations will materialize will be a key factor influencing forex, at least until mid-year.”

They also noted that they have delayed their expectation of dollar strength from Q1 to Q2, while maintaining a broader view that the currency will weaken later this year.

The team stated: “We continue to forecast a gradual depreciation of the dollar throughout 2026,” assuming the energy markets eventually normalize.

Looking further ahead, Bank of America remains bearish on the dollar, predicting EUR/USD will reach 1.20 by the end of 2026.

Strategists pointed out that risks to the outlook still depend on the path of the energy shock. Long-term disruptions could further support the dollar’s rise, while quicker resolutions might lead to some of the recent gains being reversed as war-related risk premiums subside.

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