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The U.S. Dollar Index 美元指数: Page 5 of 5

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The Dollar Smile Theory

Ever wonder why the dollar strengthens both in times of tough luck and when the economy is booming like a Beyoncé single? Well, so does everybody else. In fact, this really smart dude over at Morgan Stanley came up with a theory to explain this phenomenon.

Stephen Jen, a former currency strategist and economist, came up with a theory and named it the “Dollar Smile Theory.” His theory depicts three main scenarios directing the behavior of the U.S. dollar. Here’s a simple illustration:

The Dollar Smile Theory

The Dollar Smile Theory: PanicScenario 1: The first part of the smile shows the U.S. dollar benefiting from risk aversion, which causes investors to flee to “safe-haven” currencies like the dollar and the yen. Since investors think that the global economic situation is shaky, they are hesitant to pursue risky assets and would rather buy up the less risky U.S. dollar regardless of the condition of the U.S. economy.

The Dollar Smile Theory: Dollar bull falling off a cliffScenario 2: Dollar drops to new low. The bottom part of the smile reflects the lackluster performance of the Greenback as the U.S. economy grapples with weak fundamentals.

The possibility of interest rate cuts also weighs the U.S. dollar down.

This leads to the market shying away from the dollar. The motto for USD becomes “Sell! Sell! Sell!”

The Dollar Smile Theory: Dollar bull marketScenario 3: Dollar appreciates due to economic growth. Lastly, a smile begins to form as the U.S. economy sees the light at the end of the tunnel. As optimism picks up and signs of economic recovery appear, sentiment towards the dollar begins to pick up. In other words, the greenback begins to appreciate as the U.S. economy enjoys stronger GDP growth and expectations of interest rate hikes increase.

This theory appears to have been in play when the 2007 financial crisis began. Remember when the dollar got a huge boost at the peak of the global recession? That’s phase 1.

When the market eventually bottomed out in March 2009, investors suddenly switched back to the higher yielding currencies, making the dollar the winner of the “Worst Currency” award for 2009.

GDP percent chang vs U.S. Dollar Index

So will the Dollar Smile Theory hold true?

Only time will tell.

In any case, this is an important theory to keep in mind. Remember, all economies are cyclical.

The key part is determining which part of the cycle the economy is in.


       有没有人觉得奇怪过,为什么当世界的经济低迷时,或是当美国的经济繁荣时候,美元就会像嘻哈天王Jay-Z的混音说唱专辑一样的火红?所以,是每个人都在奇怪这个问题咯。事实上,在Morgan Stanley投资公司的,一位超级绝顶聪明的花花公子,想出了一个理论来解释这一现象。

       Morgan Stanley投资公司的,前任货币战略策划师和经济学家Stephen Jen。想出了一个理论,并命名为“美元微笑理论”。他的理论描述了三种引导美元走势,的主要情况。这里使用一个简单的例子来说明: