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  • Writer's pictureRichard Murff

That Big Dollar Smile


As of this post, the dollar has had a good morning. True, that is off some 13% since September, and 3% was last week (a hell of a swing for a currency), but the dollar is still strong enough to flood enough Americans to the fashionable parts of Europe places like that Amsterdam and Venice are trying to actively kick the touros out. A friend of mine just got back from taking the family to Germany, spent two weeks drinking beer for breakfast and arbitraged a couple of those Loden sportscoats that are both slimming and make you look like a Bond villain. I’m having trouble hiding my jealousy.

This is the weakest that the dollar has been since April of 2022, just after the Fed started raising rates, but it’s still historically strong and it doesn’t look like it is getting unhorsed anytime soon.

Earlier this year, at the last BRICS summit – Brazil, Russia, India, China and South Africa – Brazilian president Inácio Lula da Silva demanded to know why the world did nearly all of its international trade with the dollar? Well, Senhor Lula, no one eager to see a return on their money is going to use the Brazilian real, are they? Money is nothing but a store of value, a marker. Which seems simple enough, but useless without general agreement how much value is being stored.

For example: China is still carrying on about the yuan as an alternative to the dollar, but being run by Marxists, there is a disconnect with the core concept of how markets actually work. You can declare your money is worth anything you like – the rub is getting someone to actually believes you. Russia doesn’t have “full faith” in the yuan, but it got kicked from the SWIFT system and can’t use real money.

Which leaves the greenback. The truth is that individually Americans would probably be better off if the dollar wasn’t the global reserve, but America itself would lose the ability to “massage” events if the world found something else. And so here we are. And there are advantages.

It was Stephen Jen who, a couple of decades ago, came up with the theory of the Dollar Smile, and why the late dip is just the pouty part of a big, toothy American grin.

The idea is that when the US is plowing ahead of the world economically, the dollar is strengthened as investors pour it to currency to the annoyance of all the others. When the American economy is off-kilter, on the other hand, it’s a drag on the global economy – When America sneezed the rest of the world gets a cold… Paradoxically, this causes investors the world over to seek safety investments and nothing is perceived as safer than the US Treasury. Not even Senhor Lula is fool enough to wait out the economic storm with the real or the yuan. Not with his own money, at any rate.

This morning’s spike comes on the news of a building stock rally and investors are leaning to the former. Still, the signals are mixed, and broadly speaking, we don’t know. Will the economy keep plowing ahead with that sticky inflation? If so, rates will remain high, pulling in investors. Or have the rates done their job, tamed inflation at the cost of that long-awaited recession? Without China to pick up the economic slack (because the party has more faith in an obvious real estate bubble than their own currency), and an anemic Europe, a marked US slowdown will take the world with it.

Which will lead to a flight to safety – or more to the point, a big grinning American dollar.


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