The Dollar Grin Theory 😁

You ever just think, "Why does the U.S. dollar become the main character in times of chaos and also when the economy's snappin' better than a T-Swift track?" 🤔💵

Normally, other currencies fall off a cliff when a country’s economy isn’t slayin'. But nah, the U.S. dollar’s global superstar status means it stays on its grind even when the U.S. is eating popcorn on the couch.

So let’s pretend there’s two vibes to the U.S. dollar keeping it iconic:

1. The “domestic” U.S. dollar, which is vibe-checking with the economy’s mix of moods and investments.
2. The "💪 international” U.S. dollar that’s the boss in global trade deals and the must-have for U.S. bonds, which everyone sips tea about for their safety.

This “international” dollar shows its muscles when everyone’s freaking out and global growth is grinding to a halt. 💀

When things go sideways, and people start hitting the panic button (whether in America or anywhere else), the dollar flexes and starts gaining followers. 📈

Low key, some hotshot who worked at Morgan Stanley wrote the book on this and made it official with a whole theory.

What is the Dollar Smile Theory?

Stephen Jen (yup, legend who used to vibe at the IMF and Morgan Stanley and now runs things at Eurizon SLJ Capital in London) dropped a banger theory called the "💵 Dollar Smile Theory."

The Dollar Smile Theory is like: the dollar throws shade at other currencies when the U.S. economy is either popping off or in the trenches.

The Dollar Smile Theory Explained

The theory hits different based on these assumptions:

1. When the U.S. economy's the cool kid in class, the dollar glows up and gets stronger compared to its currency squad.
2. When markets are lit or crashing, and the vibe switches to risk-off, everyone races to buy that USD safety blanket. 🌍🛑💰

It’s like, the theory maps out three possible scenarios where the dollar’s behavior’s more dramatic than a reality TV show.

Check out this simple version:

Scenario #1: USD Strengthens Due to Risk Aversion

First bit of the smile shows dollar glow-up due to risk aversion; peeps ditch drama and hop onto “safe haven” currencies like the U.S. dollar or Japanese yen. 🌍

Because the global economy feels like it's two left feet, investors swap risky moves for U.S. Treasuries, needing USD and queueing to buy those for the extra safety margin. 💸

Scenario #2: USD Weakens to New Low Due to Weak Economy

Dollar takes an L, hitting new lows.

The bottom part of the smile shows the dollar catching Ls as the U.S. economy gets ghosted. 💀

Expectations of interest rate cuts can weigh it down, tho, but it’s really about what everyone thinks will go down with rate changes in the future. 🤷‍♀️

The market chants “Sell! Sell! Sell!” when the vibe shifts. 🎤

It’s like the Reggie Miller vs. Michael Jordan trade in NBA energy: everyone wants the GOAT at any given moment. 🙌🏀

Scenario #3: USD Strengthens Due to Economic Growth

Dollar rises from the ashes due to economic growth.

The glow-up starts when the U.S. economy goes from "are we there yet?" to "basically here." 🌞

As let's-get-this-bread energy spreads, more people want dollar power, hyping the currency up. 💸

And in the real-world example…

Because 2020 was a ride and the global pandemic pulled the plug on everything, the U.S. dollar became the “safe place” to be. Every economy, including the U.S., was on a struggle bus. 🚍

If the “rest of the world” gets its glow-up before the U.S. vibes out more, the dollar’s spot in the DJ booth could chill. 💿

Growth is all about relativity. If others are growing but the U.S. is growing faster, the dollar will snatch more moments and slide to the right side of that smile. 🌟

Will the Dollar Smile Theory be more than a TikTok trend?

Only time will spill the tea. 🕰️

In any case, it’s important to clock this theory. All economies have their moments to shine and slump, rinse and repeat. 📉📈

The trick is catching the U.S. economy’s time and comparing it with what others are doing out here. 🌍

The Pros and Cons of a Strong Dollar

When the dollar’s flexing, it basically makes traveling to other continents a breeze and a half for Americans. But, yo, that might not be the best cuz some American tourists are as extra as a drama series. 🤪

Plus, imported goods come with clearance sale prices into the U.S..

So, for folks in the U.S., catching flights not feelings is cheaper, and getting those exotic goods at home doesn’t break the bank. 🌍✈️

But for peeps not in the U.S., it's a hard pass. Visiting the U.S.? Cha-ching! Like taking roller coasters in Disney World. Plus, they gotta spend more on U.S. goods like oil. 🌐💸

Also, big companies making bread overseas could feel their profits take an L when they shift local coins to U.S. dollars. 😬💰

The Dollar Smile Recap

The Dollar Smile is about how the USD acts like it's doing a TikTok reel when the economy changes, creating a smile pattern when you chart it against dollar power. 📊💥

Here’s the spark notes version on the three phases of economic vibes that shape a smile:

1. Economic Recession (Left Side of the Smile)

• Cue the Safe Moves: When economic times are sus, investors go for save-the-day assets. USD’s seen as dependable like your grandma’s cookies, so demand for it rockets, making it appreciate. 🍪💵
• Cash Crew: People move funds to U.S. Treasuries like they’re gold, further sending the dollar upward. 💡

2. Economic Comeback (Bottom of the Smile)

• Weak Dollar: As the economy kinda perks up but doesn't flex too hard, the dollar usually slips. During this, folks chase higher stakes and dip into assets outside the U.S.. 🎭
• Money Maneuvers: Think low interest rates from bank bosses ‘cuz they love stimulating growth, nudging the dollar lower. 🎢

3. Strong Economic Glow-Up (Right Side of the Smile)

• Stronger Economy Wins: When the U.S. economy is chill, investors fill their carts with U.S. assets. 📈
• Interest Rate Bounce: Fed may flip those interest rates to avoid the economy turning into a theme park, drawing more foreign cash, raising demand for USD. 🎡
• Good Vibes Only: Everyone’s thrilled about America’s economy so that dollar is giving main character energy. 💫