The U.S. dollar retreated from near six-month highs after Fed Chair Jerome Powell confirmed the central bank's easing bias, raising the likelihood of a more aggressive dollar selloff ahead. However, Barclays still sees the potential for more dollar upside.

“Parts of the market worry that - like in late 2023 - the bar is too high for further dollar strength. We argue this time things are quite different,” analysts at Barclays said, in a note dated May 1.

Part of the market looks at the build-up of Fed expectations, the increase in dollar longs and the better growth outside the U.S., as potential drivers of a dollar sell-off ahead - a rerun of October 2023, the bank noted.

However, it’s different this time, Barclays said, as, opposed to October, U.S. inflation today is accelerating and is hovering at very high levels sequentially. Meanwhile, U.S. front-end rates are below October levels and the Fed ranks as a less hawkish central bank among the G10.

Another fundamental drag for the dollar, the improvement in China growth and related assets, is likely to decelerate meaningfully in the second half of the year, in the view of the bank’s Economics team.

“Intervention in China (and less so in Japan) has muted price reactions in FX (vis a vis the counterfactual). In that sense, a relative shift in rhetoric among G10 central banks is the nearest likely proxy for a catalyst for the next stage of the dollar rally,” Barclays added.