Bank of America Warns of Risks with Rising Oil Prices

Higher Prices and Currency Concerns

The recent increase in commodity prices is posing risks for those predicting a weaker American currency by the end of the year, as per the Bank of America (BofA). The bank, in a note to clients, has highlighted the impact of inflation policy responses on the US dollar.

Effect of Oil Prices on USD

BofA’s currency strategists, John Shin and Alex Cohen, emphasize that the surge in oil prices may propel the USD higher in the long term due to its positive impact on US terms of trade. They suggest that recent supply-driven oil shocks, influenced by events like the Russian invasion of Ukraine and Middle East tensions, have supported the dollar.

USD Strength and Monetary Policy

The bank attributes the dollar’s strength to higher oil prices creating a risk-off environment, along with the Federal Reserve’s restrictive monetary policy. Despite viewing the oil shocks as temporary, BofA believes oil will continue to boost the USD due to its altered relationship with the US economy.

Forecast and Potential Risks

BofA predicts a decline in the dollar in the medium term, with a year-end forecast for the pair at 1.15. However, they caution against a potential dollar rise amidst high oil prices. The bank expects cuts in US interest rates, which could impact the currency’s value in the future.