BofA flags downside risks to U.S. dollar with affordability fears in focus in Daily Currencies Ratings 18/02/2026 The letter “K” has been front of mind for investors in recent months, as markets attempt to suss out the state of the U.S. economy. Graphically, economists have suggested that the letter could provide one of the best depictions of what has been resilient — if heavily bifurcated — overall activity: consumer spending has been strong for wealthy households and corporations, but low-income earners appear to be struggling under the weight of elevated living costs. The result is a sharpening focus on affordability ahead of the all-important U.S. midterm elections in November, and what policy solutions could be offered to prop up the bottom leg of a so-called “K-shaped” economy that is “ever-widening,” analysts at BofA Securities said in a note. Attempts to lower the cost of home mortgages through a drawdown in interest rates by the Federal Reserve are the “most likely” prescriptions that could be presented by policymakers, they added. All else being equal, this could have a negative impact on the , the analysts said. They added that affordability worries link directly to current debates around the outlook for Fed policy under Kevin Warsh, President Donald Trump’s nominee to be the next Fed Chair, as well as the evolution of new artificial intelligence models and the technology’s implication on the American labor market. Uncertainty has swirled around whether Warsh, a former Fed Governor, will advocate for a shrinking of the central bank’s bond holdings. Doing so, he has argued, will allow for a ratcheting down in rates — which would also be in line with Trump’s longstanding preference for a rapid decrease in borrowing costs to help boost the economy. At the same time, murkiness has surrounded how AI will impact job gains. January’s labor market report pointed to sluggishness in business and professional services hiring, potentially signaling that firms are pulling back on spending until more clarity emerges around the capabilities of — and possible productivity boost from — AI. “We envision the potential promise of AI driven productivity/disinflation to be used as justification for easier monetary policy (and thus lower mortgage rates) amid an otherwise more buoyant economy,” the BofA analysts said. “But until labor-displacement risks are firmly in the rearview mirror, negative U.S. dollar sentiment is unlikely to subside.” The dollar index, which measures the greenback against a basket of its currency peers, has slumped by more than 10% over the past one-year period. Meanwhile, a Trump administration campaign to revive U.S. manufacturing is putting foreign exchange “center stage,” the BofA analysts said. In theory, a weaker dollar could aid factory activity by making U.S.-produced goods cheaper for overseas buyers, which could lift exports and increase foreign sales. However, raw material imports and other components would become more expensive, possibly pushing up inflation. “Hints of a more ’benign neglect’ policy has weighed on U.S. dollar sentiment risking a negative feedback loop on inflation. This has also fanned the flames over capital flow concerns, though we still put this at a low (yet emerging) risk,” the BofA analysts wrote. Against this backdrop, BofA’s preferred indicators of foreign exchange flows and positioning have yet to show evidence of major shifts or “debasement” in the dollar. The analysts said investor pos