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The dollar has come full circle since the start of the Iran war, first strengthening amid the initial surge in oil prices and then weakening following the ceasefire announcement in April.
Bank of America maintains a short-term bullish stance on the US dollar as the DXY index remains in a historically tight 12-month range, according to a research note published Thursday.
Consolidation in near-month oil futures amid hopes for a resolution to the conflict has kept volatility in the forex market and the dollar itself under pressure.
The bank noted that upside risks appear undervalued. The dollar received only moderate support from a range of positive US data, including labor market, retail sales, and inflation data.
The market remains reluctant to significantly price in the upper bound of the Federal Reserve's interest rate distribution from a monetary policy perspective. As a result, the Fed's rate hikes are only marginally reflected in the curve. A significantly higher number of rate hikes are factored into the curves of several other G10 central banks. Bank of America believes that central bank pricing is more likely to converge than diverge, given relative economic outlooks.