The dollar can strengthen to new highs if central banks fail to achieve a soft-landing and inflation stays elevated, Bank of America says

• BofA said Fed messaging will impact the dollar this week as the central bank gears up for an outsized rate hike.
• Analysts said the dollar can only weaken if US inflation shows it is on a clear downward path.

The dollar remains at its strongest level in 20 years in nominal terms but it could soar to new highs if central banks deliver a hard landing for their economies, according to Bank of America.

The Federal Reserve's two-day meeting begins Tuesday, and markets are broadly expecting it to announce a third jumbo hike of 75 basis points.

This week also includes policy decisions from the People's Bank of China, Bank of Japan, and Bank of England — all of which command currencies that have fallen against the dollar this year.

"[T]he USD call is effectively a US inflation call," Bank of America analysts wrote in a Monday note. "Under the assumption that the Fed remains committed to fight inflation but also would like to avoid a hard landing, we would expect the USD to start weakening only when US inflation is on a clear downward path."

BofA's baseline scenario, according to the note, is for the dollar to begin depreciating by the end of 2022 or early next year, but that outlook could be derailed if inflation fails to abate and central banks miss on a soft-landing.

"But if our baseline proves to be wrong and we are in the negative scenario, in which inflation is even higher and central banks cannot avoid a hard landing to bring it down, the USD could reach further highs and stay there for longer," analysts maintained. "The inflation data in the rest of the year will help us decide whether this is the case or not."

Meanwhile, ex-Treasury boss Larry Summers warned that the cost of hiking rates too slowly could be stagflation — a combination of declining economic growth, high inflation, and climbing unemployment.

Summers told Bloomberg Friday that if the Fed is serious about beating back inflation, he wouldn't be surprised if rates peaked above 5%.

"History records many, many instances when 
policy adjustments to inflation were excessively delayed, and there were very
 substantial costs to that," he said. "I 
am aware of no major example in which the central bank reacted with excessive
 speed to inflation, and a large cost was paid."