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Last updateSat, 29 Jul 2017 12am

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Dollar Smile Hypothesis

Dollar Smile Hypothesis, advanced by Stephen Jen, Morgan Stanley's currency strategist, says "the dollar had a 'convex' relationship to US economic growth."

What this mean is that, the dollar will rise if:

  1. The US economy goes into a severe decline, or hard landing because the rest of the world suffers, and the dollar is a relative safe haven.
  2. The US economy goes on a growth spurt, outpacing the rest of the world, the dollar gains.

However, the dollar will be pummelled if it is a 'soft landing' for the US economy because other countries have higher interest rates, and there is nothing to defend the dollar.

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Reference:  Financial Times, John Authers, 2008-09-04, 'The Short View: Smiling dollar'