It's possible I suppose but a long trek for an interchange between local services, and would have to be fully enclosed, so expensive, but might be incorporated within new buildings developed on the vacant land to the south of Callaghan Square, as could a trackbed. I don't agree that reversing is such a huge faff. Clearly it takes more time but you can add multiple platform tracks to compensate and by definition it allows more leisurely dwells for easier boarding. In this case you could have (say) 4 terminal tracks. The terminal layout also gives a short reversing facility for service recovery, or indeed for planned short working of some services (peak extras?). Reversing some services in the main part of Central should also be possible and less operationally risky if carried out out on a middle platform, in a classic centre reversing road configuration. The new layout appears to support this on #7 if down tram-trains to Barry/Penarth routinely use new platform #8.
As to street running, yes you can go virtually anywhere on the road within the performance limits of the particular vehicles used, but to design a reliable network you don't want to share with other road traffic very much at all ideally, and only in areas where you know it won't routinely block back and cause delay. Hence good traffic management incorporates as much segregation as possible, traffic signal priority etc. I was most impressed with those measures as applied in Nottingham when I first rode NET a few months ago. A few random comments from local regular riders confirmed a very high level of customer satisfaction with the system, with on time performance and reliability being top on their lists of accolades. They all seemed very proud of their tram.