Investing.com – The US dollar retreated from its highest level in nearly six months after Fed Chairman Jerome Powell reaffirmed the central bank’s easing bias, raising the possibility of a more aggressive dollar sell-off. However, Barclays still sees scope for more upside for the dollar.
“Parts of the market are concerned that – just like at the end of 2023 – the bar is set too high for further dollar strength. We argue that things are very different this time,” Barclays analysts said in a May 1 note.
Part of the market sees the build-up 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 October 2023, the bank noted .
However, this time is different, Barclays said, because today, unlike October, US inflation is accelerating and continues to hover at very high levels consecutively. Meanwhile, US interest rates are below October levels and the Fed is considered a less aggressive central bank within the G10.
Another fundamental drag on the dollar, the improvement in Chinese growth and related assets, is likely to slow significantly in the second half of the year, the bank’s Economics team said.
“Intervention in China (and less so in Japan) has dampened currency price responses (relative to the counterfactual). In this sense, a relative shift in rhetoric among G10 central banks is the most likely indication of a catalyst for the next phase of the dollar rally,” Barclays said.
