'The foundation for a powerful US dollar rally is in place'

Stephane Mahe/Reuters

File photo of an employee looking at the propeller of a Scorpene submarine at the industrial site of the naval defence company and shipbuilder DCNS in La Montagne near Nantes, France, April 26, 2016.

After a strong two years, the dollar has remained more or less flat during the last few months, with the trade-weighted dollar index hovering near a range of 93 to 98.

But now, some analysts are arguing that the greenback could have some room to go.

"...the foundation for a powerful USD rally is in place. In many aspects, the USD outlook is stronger than it was last year," argued a Morgan Stanley team led by Hans W. Redeker in a recent note.

"Valuation has moderated and the market is expecting fewer hikes over the next 12 months than it did at this time last year. With only 27bp priced in, including 15bp in December, there is less scope for hikes to be priced out. As a result, risk appetite may suffer in response to any downside surprise in growth, in turn boosting the USD," they explained.

Meanwhile, a BNP Paribas team led by Steven Saywell wrote in a note that they remain "cautiously positioned for USD gains later this year via USDJPY, EURUSD."

Still, not everyone shares that view.

Jefferies' chief market strategist, David Zervos, recently had a more bearish take, arguing that this year's presidential election could lead to a weaker American currency. That is in part because of the two major-party nominees' somewhat skeptical positions on free trade, with Republican Donald Trump being the more negative influence.

In any case, the US dollar is closing out the week on a strong footing, and is up by 0.4% at 98.68 as of 10:57 a.m. ET.

Investing.com