Dollar Smile Theory
Dollar Smile Theory — USD strength in both risk-off and US exceptionalism regimes.
Definition
Dollar Smile Theory refers to uSD strength in both risk-off and US exceptionalism regimes. Keep that definition fixed when comparing series, managers, or regimes — renaming the same tape does not create a new signal.
Why it matters
FX clears cross-border funding and relative growth; dislocations show up here early. When uSD strength in both risk-off and US exceptionalism regimes shifts, related hedges, limits, and narratives usually need an explicit update rather than a quiet assumption.
Case
Suppose a desk is positioned for the opposite of what dollar smile theory is saying. If uSD strength in both risk-off and US exceptionalism regimes moves against that book, the first question is not “is the story clever?” but whether size, hedges, and stop logic still match the observation.
How to read it
Check basis, intervention risk, and rate differentials — spot alone is incomplete. Prefer a short written null hypothesis for Dollar Smile Theory: what would falsify the current reading in the next window?