The world economy is cyclical. And if during the expansion or reduction of GDP US dollar allows other currencies of competitors to take the initiative, that during the recession pulls the blanket over himself. Blame the importance of the US economy and that a colossal role of greenbacks in international payments, foreign exchange reserves, the volume of trading on the Forex and in cross-border lending. In times of global downturns investors forget about the impact of European macroeconomic data on the euro, on the impact of monetary policy the Bank of Japan on the yen, about the pressure of political risk on the British Pound. Their eyes are turned to the single currency. US dollar.
It is interesting that during the recession greenbacks behaves the same pattern that formed the basis of the developed currency strategist at Morgan Stanley Stephen Jen theory "dollar smile" .
The dynamics of the USD index is clearly seen three stages:
is its purchase, as the US economy is firmly on its feet;
-prodayut against the backdrop of aggressive Fed monetary expansion
s re-buy because of hopes that the recovery rate of GDP growth will surpass US counterparts in other countries.
The result is a picture that is very similar to a smile.
Consider the USD index dynamics in more detail. In the first stage uses greenbacks increased populyarnostyuiz of silyekonomiki USA. It looks better than the other, which increases the demand for US stocks and bonds, and leads to an increase in the flow of investment to the United States. In 2019 at the beginning of 2020 the USD index actually grew thanks to the impressive rally S & P 500 and the high demand for Treasuries because of the trade wars.
The first stage is completed the correction of US stock indices, which ultimately leads to the stock market under the control of the "bears". The dollar reached its peak, "the left side of a smile," because of the flight of investors into quality. He serves as the base currency of refuge. At the end of February due to S & P 500 moved into the territory of coronavirus "bears" in record time - within 16 days. Direct correlation with the USD index stock index was replaced by the reverse. In the first stage of the previous global economic crisis, greenbacks from March to November 2008 rose by 24%.
Dynamics of the dollar and the US GDP
In the second stage, which Stephen Jen calls the "bottom of Smiles", there are sales of greenbacks because of aggressive Fed monetary expansion. Reducing the federal funds rate to near zero, unlimited purchase of assets and a large-scale fiscal stimulus from the White House launched a downtrend on the S & P 500 at the end of March. Growth in demand for risky assets contributes to the elimination of long speculative positions on the greenback. A very similar situation occurred at the end of 2008, when the Federal Reserve with the help of aggressive monetary expansion, including the launch of QE by $ 700 billion, tried to turn the "bearish" trend of US stock market and down a peg with the greenback fans. For some time, even the feeling that he did it - the USD index fell in December.
Dynamics dollar and S & P 500
In the third stage the dollar returns to growth, as investors are beginning to believe that the US economy will recover faster than their foreign counterparts. US stocks look cheap, and low cost of borrowing, the ultra-loose monetary policy the Fed is gradually rising from its knees GDP and hope for the growth of corporate profits contribute to the return of interest to non-residents issued in the United States assets.
If we follow the theory of the "dollar smile", it is now necessary to actively buy greenbacks. However, not the fact that the US economy will be able to recover faster than global GDP driven by China, and a strong desire to strengthen the Fed to prevent the "American" can seriously change the rules of the game.
Source analyst LiteForex