Bank of America (BofA) has published a research note outlining three potential scenarios that could support a stronger US dollar in the second half of 2026, as currency markets grapple with diverging interest rate paths and global economic uncertainty.
The first theme revolves around monetary policy divergence. With the US Federal Reserve expected to maintain a more hawkish stance than the Bank of England and the European Central Bank, higher US interest rates could continue to attract capital inflows, boosting the dollar. The second scenario centres on safe-haven demand amid ongoing geopolitical tensions and trade frictions, which historically benefit the greenback. The third theme is potential US economic outperformance relative to other major economies, driven by resilient consumer spending and labour market strength.
In currency markets on Thursday, the pound traded at $1.2835, down 0.3% on the day, while the euro slipped to $1.0920. The dollar index, which measures the greenback against a basket of six major currencies, edged up 0.2% to 104.85. Analysts noted that sterling has been under pressure this week following weaker-than-expected UK GDP data for May, which raised questions about the pace of the UK recovery.
For UK investors and pension holders, a sustained rally in the dollar could have mixed implications. A stronger dollar makes imported goods cheaper in sterling terms, potentially easing inflation pressures. However, it also reduces the value of overseas earnings for FTSE 100 companies that generate a significant portion of revenue in dollars, which could weigh on the index. The FTSE 100 closed at 8,215.4 on Wednesday, down 0.4% for the week.
Jane Foley, senior currency strategist at Rabobank, commented: 'The dollar's direction in the second half will hinge on whether the Fed actually delivers the rate cuts markets are pricing in. If US data remains robust, the dollar could strengthen further, which would be a headwind for UK exporters.' She added that the Bank of England's next policy decision in August would be crucial for sterling's trajectory.