Investing.com – The US dollar pulled back from its highest levels in nearly six months after Federal Reserve Chair Jerome Powell reiterated the central bank's dovish bias, raising the possibility of a stronger dollar sell-off ahead. However, Barclays still sees potential for the dollar to rise further.
“Parts of the market are concerned – as they did in late 2023 – that the benchmark is too high to allow for further dollar strength. This time, we say, things are very different,” Barclays analysts said in a note dated May 1. .
The bank noted that part of the market views the buildup in Fed expectations, the increase in dollar long positions and better growth outside the US, as potential drivers of a future dollar sell-off – a repeat of what happened in October 2023.
However, Barclays said that this time is different, as unlike in October, inflation in the US today is accelerating and hovering at successively very high levels. Meanwhile, US prime interest rates are below October levels, and the Federal Reserve ranks as the least hawkish central bank among the G10.
Another fundamental drag on the dollar, the improvement in China's growth and related assets, is likely to slow significantly in the second half of the year, in the view of the bank's economic team.
“Intervention in China (and less so in Japan) has moderated price reactions in the FX market (versus the counterfactual). In this sense, the relative shift in rhetoric among G10 central banks is the closest possible proxy for a catalyst for the next phase of Dollar rise.