Investing.com — The stock market snapped a four-week losing streak on Friday, and some believe it’s time to buy the dollar as the fighting spirit looks set to continue.

“We have recommended a trading range in DXY between 101 and 108. DXY recently reached our buy zone and we suggest it is time for traders to enter long positions,” BCA Research said in a recent note.

As the BCA notes, the bullish sentiment towards the dollar has a history, or rather a history of interest rate cut cycles, adding that the ups and downs in the currency market during the interest rate cut cycle are quite regular.

The dollar has tended to stagnate or decline in most cycles leading up to the first Fed rate cut. However, the dollar is already at its lowest point compared to previous cycles, assuming the Fed starts cutting rates in September, suggesting that there may be confined room for a significant decline.

“The median gain in the DXY index over the next 12 months following Fed easing is 5%,” BCA added.

In previous cut cycles, the Fed has cut rates by an average of nearly 400 basis points in the 12 months following the start of an easing cycle. This time, however, the market is pricing in a Fed cut of about 200 basis points, or half the historical average.

“If our thesis is correct and the Fed does not cut rates any further than markets have already priced in, that would be positive for the dollar,” BCA said.

The divergence in monetary policy expectations between the U.S. and other major economies is also expected to support the dollar.

“Our work (on GDP sensitivity to interest rates) suggests that policy is already very restrictive for the UK and the eurozone. These economies are likely to see deeper recessions compared to the US,” the BCA said.

However, not everyone is convinced that the dollar’s recent strengthening marks the beginning of a long-term rally.

BCA says the sentiment towards the dollar is already bullish as “most investors are already long the dollar,” exposing itself to the risk that a catalyst will force a potential liquidation of leveraged dollar long positions.

“That catalyst will be higher equity prices, lower bond yields and low volatility,” BCA said, pointing to volatility as a key indicator to watch given its tight correlation with the dollar.

“One of the activities we care about most will be tracking volatility trends,” it added.