Clearly Starfleet seems to be the largest economic power in the known galaxy and often a large economic power can overwhelm a superior military force through sheer numbers, technological advances and alliances. Which seems to be what happened here.
No what happend was the dominion fleet got cut off and had to reley on a 3rd rate power to maintain it.
If the wormhole had been avalible then it would of crushed the Alpha/Beta quadrent races like insects.
The most powerfull in the milkyway is the Borg. I dont think you can deny that. But the Domnion is deffinatly above the Federation.
Quite frankly though there are vast unexplored areas of the mikyway the dominion were only stmbled on by chance. There may be some other powerfull empires out there.
I also think the Krenim from voyager would have been able to go toe to toe with the Federation.