Has Yellen just unleashed the dollar bulls?

What can take the US dollar higher?
What can take the US dollar higher?

The rally in the U.S. dollar on the notion that U.S. interest rates could rise sooner rather than later may just be getting started, analysts say.

The dollar soared more than 1 percent against the yen and almost 1 percent versus the euro on Wednesday after new Federal Reserve Chair Janet Yellen said interest rates could start to rise six months after the scaling back of monetary stimulus ends.

(Read more: Yellen indicates rate hike sooner than expected)

Ray Attrill, co-head of currency strategy at National Australia Bank said that as long as upcoming U.S. economic data confirms the Fed's confidence that recent weakness in data is related to unusually cold weather, the dollar should head higher.

"They [Fed policymakers] have not downgraded growth forecasts for this year or next and the fact they haven't done that is one reason why they are hawkish," he said.

"If data disappoints that could trigger the dollar to unwind some of the gains, but we think the data will start to improve and therefore that means the dollar gains should be built on," Attrill added.

Dimas Ardian | Bloomberg | Getty Images

The Fed concluded a two-day policy meeting on Wednesday by scaling back its asset-purchase program by a further $10 billion to $55 billion a month. The comments from Yellen, speaking at her first news conference as Fed Chair, took markets by surprise.

(Read more: Why equities sold off despite a dovish Fed)

The central bank started unwinding its massive monetary stimulus at the end of last year and if the program winds down in the fall, that would put a rate hike in the spring of 2015, earlier than market expectations for the second half of the year.

"Quantitative easing helped deal with the [financial] crisis but it has been disappointing in fostering the recovery, so the sooner the Fed abandons the policy the better," Stephen Roach, a senior fellow at Yale University told CNBC.

(Read more: Traders jittery as Yellen implies earlier rate hike)

U.S. dollar index: Three month chart

Kathy Lien, managing director at BK Asset Management, added: "The fact that Janet Yellen is talking about rate hikes at all in her first meeting as Federal Reserve Chair is extremely bullish for the dollar and providing specifics on timing gives investors a target to look forward to."

"With the end of ZIRP [zero interest rate policy] now in sight, we expect further gains in the dollar and yields," she said in a note.

The dollar index, which measures the dollar's value against a basket of other currencies in terms of trade, stood at 80 on Thursday, near a two-week high hit the previous session.

It's up almost 1 percent from four-month lows hit earlier this month. Credit Agricole expects the index to hit 84.98 on a 12-month horizon, implying a gain of 6 percent from current levels.

National Australia Bank's Attrill expects the dollar to outperform the Swiss franc and euro.

"Dollar/yen is potentially the currency that could find its feet again," he added.

— By CNBC.Com's Dhara Ranasinghe; Follow her on Twitter @DharaCNBC