Investors have increasingly been thinking in terms of the letter "K" to describe the current U.S. economic landscape, where activity looks robust overall but is sharply divided across different groups.
Graphically, the shape captures how consumer spending remains resilient among wealthier households and corporations, while lower-income earners are facing strain from high living costs. That split is drawing heightened attention to affordability concerns as the November midterm elections approach, according to a note from analysts at BofA Securities.
In their view, one of the most plausible policy responses to those affordability pressures would be moves that bring down mortgage costs via a reduction in interest rates by the Federal Reserve. The analysts said such a development, all else equal, would be a headwind for the U.S. dollar.
Those affordability worries are intertwined with ongoing market debates about the likely direction of Fed policy under President Donald Trump’s nominee for Fed Chair, Kevin Warsh, and with questions about how the latest artificial intelligence models could affect the American labor market.
There is uncertainty over whether Warsh, who served as a Fed Governor, would push for a reduction in the central bank’s bond holdings. Warsh has argued that shrinking the Fed’s balance sheet would permit a lowering of interest rates, a position that would align with Trump’s long-standing preference for rapid cuts in borrowing costs to stimulate the economy.
At the same time, the impact of AI on jobs remains unclear. BofA pointed to January’s labor report, which showed weakness in hiring within business and professional services, as a potential sign that firms are pausing on spending until they better understand AI’s capabilities and the possible productivity gains it may bring.
"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 wrote. "But until labor-displacement risks are firmly in the rearview mirror, negative U.S. dollar sentiment is unlikely to subside."
The dollar index, which tracks the greenback against a basket of major currencies, has fallen by more than 10% over the past year, the analysts noted.
Meanwhile, the Trump administration’s push to reinvigorate U.S. manufacturing has put foreign exchange squarely in the spotlight. A weaker dollar could, theoretically, boost factory output by making American-made goods cheaper for foreign buyers and thereby lifting exports and overseas sales.
However, BofA cautioned that a softer dollar would also make imported raw materials and other components costlier, a dynamic that could feed through into higher 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 analysts wrote.
On the balance of measurable indicators, BofA said its preferred metrics for foreign exchange flows and investor positioning have not yet revealed signs of a major structural shift or a broad-based "debasement" of the dollar.
Investor positioning remains net short the greenback, the analysts said, though not to the extremes seen in the first half of 2025, when President Trump initially implemented wide-ranging tariffs on multiple countries.
"Likewise, relative equity and fixed income inflows do not suggest foreign investors are rushing to exit their U.S. exposures. We do see scope for increased U.S. dollar hedging, which is a factor in our lower-dollar thesis for 2026," the BofA team added.
Key takeaways from the note outline how policy choices, technological change and capital flows intersect to shape currency dynamics. The analysts highlight that, while measurable shifts are limited so far, the combination of affordability pressures, Fed policy uncertainty under a potential Warsh chairmanship and the labor effects of AI could keep downward pressure on the dollar unless labor-displacement concerns ease.