Column-Dollar's smile makes Wall Street frown: McGeever
By Jamie McGeever
ORLANDO, Florida (Reuters) — The 'dollar smile' can be a blessing for Wall Street, or a curse.
Right now, with the dollar's boom being driven by a destabilizing surge in U.S. bond yields, heightened uncertainty over global growth and rapidly deteriorating investor sentiment, it is definitely the latter.
The gist of the 'dollar smile' theory, floated by currency analyst and now hedge fund manager Stephen Jen 20 years ago, is this: the dollar typically appreciates in good times (booming investor confidence and roaring markets) and bad (times of great financial stress and 'risk off' markets), but sags in between.
U.S. economic outperformance in a solid global expansion attracting strong investment inflows into U.S. assets, and Treasury yields higher than their international peers is a recipe for strong dollar and buoyant Wall Street.
The circumstances that have fostered the dollar's rapid rise since July could not be more different.
The Chinese, European and many emerging economies are creaking, fears are growing that aggressive Fed policy will 'break' something at home, and the explosion in real yields has left Wall Street — especially growth and tech stocks — shrouded in a mushroom cloud of worry and uncertainty.
In terms of the 'dollar smile', these are 'bad' times. There is a growing sense in markets that the negative relationship between U.S. stocks, the dollar, and yields could persist for months.
«I expect it to remain negative for the foreseeable future, that is the next three to six months,» reckons Stuart Kaiser, head of U.S. equity trading strategy at Citi. «This is a risk-off environment.»
Kaiser reckons S&P 500 returns have fallen by around 7.5% over the last two months. The dollar has
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