Is the sun setting on the dollar rally?

Dovish words from Federal Reserve Chair Janet Yellen on Tuesday caused a rush to so-called "risk assets" and have left traders contemplating whether the U.S. dollar will trend lower for the rest of the year.

"We are looking at the dollar weakening through quarter-end and even in the beginning part of April as well," Richard Cochinos, the head of European FX strategy at Citi, told CNBC Wednesday.

Kit Juckes, global head of foreign exchange strategy at Societe Generale, went one step further. His immediate reaction after Yellen's speech was that the sun was setting on the dollar's rally in a way that recalled its last big uptrend in the late 1990s which was reversed by a "sharp fall in real yields as the Fed eased too much in 2002/2003."

"For now, I'd rather stick to a description of the 'trade in currency wars' and a range-bound dollar rather than a bear trend. But that could easily change," he said in a note on Wednesday morning.

The dollar's rise has been one of the key investment themes in the last few years since the U.S. central bank decided to ease back on the monetary stimulus it had pumped into the economy following the financial crash of 2008. Its rise compounded a slump in commodities - which are traditionally priced in dollars. It has also coincided with emerging market weakness which had seen large inflows after the 2008 crash with investors seeking yield overseas.

Federal Reserve Chair Janet Yellen.
Getty Images
Federal Reserve Chair Janet Yellen.

But a new chapter could be in the offing for the dollar in 2016 with the Fed now widely expected to spend most of the year on the sidelines and curb the amount of rate hikes it performs.

"QE may well be back upon the table; monetary expansion is indeed upon the table. The dollar, in Yellen's opinion, has been far too strong and has been cast off from the table," closely followed market watcher Dennis Gartman said in a morning note on Wednesday.

He highlighted that the Canadian dollar, the Australian dollar and the New Zealand dollar have been the real beneficiaries of the greenback's weakness and added that this would continue "relentlessly."

Speaking to the Economic Club of New York on Tuesday, Yellen noted in prepared remarks that it is appropriate for policymakers to proceed "cautiously." Many traders have underlined that the risks for the Fed are from outside influences which would mean that decent data for the U.S. in the coming months would do little to change the central bank's policies.

On Tuesday, the dollar index - the greenback measured against a broad basket of currencies - lost 0.84 percent and saw its worst performance in nearly two weeks.

"The U.S. dollar stands at risk of facing additional headwinds throughout 2016 especially as the central bank head shows a greater willingness to further delay the normalization cycle," David Song, a currency analyst at forex firm DailyFX, said in a research note.