Investing.com – The U.S. dollar retreated from nearly six-month highs after Federal Reserve Chairman Jerome Powell reaffirmed the central bank’s intention to ease policy, raising the prospect of a more aggressive dollar selloff in the future. However, Barclays still sees potential for further growth in the dollar.
“Part of the market is concerned that, as at the end of 2023, the bar is too high for the dollar to strengthen further. We argue that this time will be very different,” Barclays analysts said in a May 1 note.
Part of the market views strengthening Fed expectations, increasing dollar long positions and improving growth outside the US as potential factors for the upcoming dollar sell-off – a repeat of October 2023, the bank noted.
However, this time is different, Barclays said, because, unlike in October, US inflation is accelerating today and consistently hovering at very high levels. Meanwhile, U.S. interest rates are below October levels and the Fed is seen as the least aggressive central bank among G10 countries.
Another fundamental headwind for the dollar – improving Chinese economic growth and related assets – is likely to slow significantly in the second half of the year, according to the bank’s economic team.
“Intervention in China (and to a lesser extent in Japan) muted the price reaction in the foreign exchange market (relative to the counterfactual situation). In this sense, a relative shift in the rhetoric of G10 central banks is the immediate likely catalyst for the next leg of the dollar rally,” Barclays added.