• The U.S. dollar remains overvalued despite recent easing and could become undervalued next year if U.S. institutional strength erodes further.
  • Bank of America projects the euro could rise to a range of $1.20–$1.25 in 2026 from its current level near $1.1651.
  • The bank's analysis points to German fiscal stimulus, trade tensions, and political risks as key factors pressuring the greenback.

A Shift in Currency Fortunes

Bank of America analysts are signaling a potential sea change for the U.S. dollar, which they contend remains slightly overvalued after a period of decline this year. The more striking forecast, however, is that the currency could tip into undervalued territory next year, a scenario that hinges on the further erosion of U.S. institutional strength. This would mark a significant shift from the dollar's persistent overvaluation, a feature of global markets for roughly a decade.

The path toward fair value this year was paved by a confluence of global factors, including a notable fiscal stimulus package in Germany that has bolstered the euro. Simultaneously, simmering trade tensions and growing concerns over political gridlock and regulatory uncertainty in the United States have chipped away at the dollar's premium. "What we're seeing is a recalibration based on relative economic and political dynamics," said one person familiar with the bank's analysis.

The Institutional Risk Factor

Central to BofA's warning is the role of U.S. institutional credibility. The analysts suggest that a continued decline in perceived stability—whether from fiscal imprudence, political instability, or other shocks to governance—could be the catalyst that pushes the dollar below its fair value. This would fundamentally alter the landscape for importers, exporters, and international investors who have long operated under the assumption of dollar strength.

The bank's projection for the euro to climb to $1.20–$1.25 next year reflects this bearish dollar outlook. The currency pair was last trading around $1.1651, indicating significant potential appreciation for the common currency if BofA's thesis plays out. This forecast aligns with a broader sense of caution among some investors regarding the long-term trajectory of U.S. assets relative to their international counterparts.

Bank of America itself continues to demonstrate operational resilience amid these macroeconomic crosscurrents. The institution recently posted strong quarterly results and announced an 8% dividend increase to $0.28 per share, coupled with a new $40 billion stock repurchase program—a move that signals confidence in its own capital strength regardless of currency fluctuations.

Attempts to reach additional Bank of America strategists for further comment were not immediately successful. Market participants will be closely watching upcoming U.S. economic data and political developments for signs of the institutional erosion highlighted in the report.