Column-The dollar's 'smile' looks painted on: McGeever

investing.com:

By Jamie McGeever

ORLANDO, Florida (Reuters) — Only a return of more aggressive Fed easing speculation or a switch out of relatively expensive U.S. stocks seems likely to wipe the dollar's smile off its face.

Currency markets still appear to be in thrall to the so-called «dollar smile» — the model that posits two extreme scenarios which both tend to boost the dollar.

The theory is essentially this: the dollar rises in good times (relatively strong U.S. growth, «risk-on» markets and high asset returns) and in bad (times of global risk aversion that draw domestic capital home to cash and overseas money to the safety of U.S. Treasuries), but sags in between.

Those «in between» times are often when U.S. interest rates are low or falling, and the domestic economy is muddling along or under-performing relative to its global peers.

Right now, the dollar is being underpinned to varying degrees by both sides of that smile: market turmoil in China, recession in Japan and Britain, and geopolitical tensions around the globe on one; a stubborn Federal Reserve that is in no rush to ease policy ahead of other central banks, and a booming tech-led Wall Street on the other.

Long-forecast dollar declines seem exaggerated and short positioning increasingly under water.

What's more, currency markets are quite relaxed about it — as the dollar climbed to a three-month high against a basket of major rivals this week, implied volatility across major currencies has slid to a two-year low.

So far this year Wall Street is up, Treasury yields are holding firm, and the dollar is proving hard to unseat. Two factors could push the dollar higher still in the near term — investor positioning and rate differentials.

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