What Is the Dollar Smile Theory and Does It Still Work Today?
Direct answer
The dollar smile in Fed data
The dollar smile is a framework, first popularised by a currency strategist at Morgan Stanley in the early 2000s, saying the US dollar tends to strengthen at both ends of a smile: in global crises, when investors rush to dollar safety and funding, and when US growth clearly outpaces the rest of the world. In the middle, when global growth is decent and the US is not special, the dollar tends to weaken. Fed data show it worked in 2008, March 2020 and 2022, when the broad dollar rose 23%, 8% and 16% in those episodes. It failed in April 2025, when volatility spiked but the dollar fell, so treat it as a tendency, not a law.
- Left side (panic): broad dollar +23.5% Jul 2008 to Mar 2009
- +8.1% in two weeks of March 2020
- Right side (US outperformance): +15.9% May 2021 to Sep 2022 as the Fed hiked
- Middle: weaker dollar when global growth broadens
- Exception: April 2025, VIX hit 52 while the dollar fell
- Broad index 121.9 on Nov 6, 2026
Most currency theories are about one cause: rates, growth or risk. The dollar smile combines them, which is why it is popular, and also why it needs checking against what the dollar actually did.
What people on X are asking
In July 2022 a strategist noted that risk assets were rallying as the dollar weakened and called the dollar smile a useful framework for gauging risk appetite: the USD is strong in a global recession or when the US outperforms. In March 2023 another account asked in a thread whether the dollar smile is still valid in the new market regime, pointing out the theory's prediction of a softer dollar if the US entered recession first. And in February 2023 one investor wondered whether others had heard of the dollar smile at all in relation to the dollar and long Treasury bonds.
What people in the thread said
- @ChengWeiChin1 replied that the idea came from Morgan Stanley and has "held up pretty well". The origin is right: it was popularised by a Morgan Stanley currency strategist; the data below test the second part.
- @KiwiPMI joked that if every other central bank follows the Fed higher, it becomes a lopsided smile. A fair point: the right side depends on the US doing better than others, not on US rates alone.
These are community comments, summarised in our words; the data and sources below come first.
The fact-checked answer
The three zones.
- Left side, global panic: investors and banks need dollars to repay dollar debts and buy Treasuries, so the dollar rises even if the crisis starts in the US.
- Middle, broad global growth: capital flows to faster-growing or higher-yielding economies abroad, and the dollar drifts lower.
- Right side, US outperformance: stronger US growth and higher US rates attract capital, and the dollar rises.
What the Fed's broad dollar index did. The Federal Reserve's nominal broad dollar index (H.10 release, on FRED as DTWEXBGS) weights the dollar against 26 currencies by trade. It is broader than the six-currency DXY; see DXY vs the Fed's broad dollar index.
UXS chart
Nominal broad US dollar index since 2006 (Fed H.10)
Broad dollar index (Jan 2006 = 100): latest
121.88
November 6, 2026
Highest in chart period
130.04
January 13, 2025
Lowest in chart period
85.47
July 26, 2011
Change over 1 year
+0.2%
vs November 6, 2025
Year by year: Broad dollar index (Jan 2006 = 100)
Computed by UXS from the same data as the chart. Tap a column header to sort. * = year to date (latest data November 6, 2026).
| 2026* | 121.88 | +1.8% | 122.00 | 117.44 |
| 2025 | 119.75 | -7.4% | 130.04 | 119.13 |
| 2024 | 129.28 | +9.2% | 129.28 | 119.25 |
| 2023 | 118.42 | -2.5% | 124.01 | 117.03 |
| 2022 | 121.43 | +5.3% | 128.45 | 114.18 |
| 2021 | 115.28 | +3.6% | 116.58 | 110.50 |
| 2020 | 111.32 | -2.9% | 126.13 | 111.22 |
| 2019 | 114.67 | -0.8% | 118.31 | 113.55 |
Did the smile work? Broad dollar and VIX in five episodes
Computed by UXS from FRED's DTWEXBGS and VIXCLS daily closes. Episode dates are our choice of start and end points around each event. Tap a column header to sort.
| Global financial crisis | Jul 15, 2008 – Mar 9, 2009 | Left (panic) | +23.5% | 80.9 (Nov 20, 2008) | Yes |
| Euro debt stress | Jul 29 – Oct 4, 2011 | Left | +8.4% | 48.0 (Aug 8, 2011) | Yes |
| Covid crash | Mar 6 – Mar 23, 2020 | Left | +8.1% | 82.7 (Mar 16, 2020) | Yes |
| Fed hiking, US outperformance | May 25, 2021 – Sep 27, 2022 | Right | +15.9% | 36.4 (Mar 7, 2022) | Yes |
| Tariff shock | Apr 1 – Apr 21, 2025 | Left, expected | −3.3% | 52.3 (Apr 8, 2025) | No |
Where it failed. In April 2025 US tariff announcements set off a sharp global sell-off. The VIX closed at 52.3 on April 8, a panic level, yet the broad dollar fell from 126.4 to 122.3 over three weeks. The shock came from US policy itself, and investors sold US assets rather than buying them, the opposite of the left side of the smile. Over 2025 as a whole, the index fell about 7.8%. That episode is the strongest evidence that the smile depends on the dollar being seen as the safe asset. Gold took that role instead; see whether gold and the dollar always move in opposite directions.
UXS decision diagram
Which side of the smile are we on?
Text version of the diagram
- Is there a global panic, with the VIX far above normal? If no: Go to the growth question
- Is the panic centred on US policy or US credibility? If no: Left side: the dollar usually rises
- Is US growth clearly beating Europe, Japan and China? If no: Middle: dollar tends to drift lower
- Otherwise: US-origin shock: the smile may not hold; the dollar can fall
Diagram drawn by UXS. A simplified decision aid for education, not a recommendation.
How to use it. The smile is a map of scenarios, not a timing tool. Ask two questions: is there panic, and who is growing faster? Then check whether the US is the source of the shock. Pair it with rate differentials, which our page on what moves the US dollar index covers, and with safe-haven alternatives such as the Swiss franc.
Decision helper
| Scenario | Smile prediction |
|---|---|
| Global recession, crisis abroad | Dollar up |
| Strong US, weak rest of world | Dollar up |
| Synchronised global recovery | Dollar down |
| Shock caused by US policy | Unclear; may break |
Related reading: why the yen is so weak, whether rate hikes always strengthen a currency and what the St. Louis Fed stress index measures.
Common mistakes
- Treating every sell-off as a reason to buy dollars.
- Ignoring whether the shock comes from the US itself.
- Using the DXY alone when most trade is with non-euro partners.
FAQ
Who came up with the dollar smile?
It was popularised by a Morgan Stanley currency strategist in the early 2000s.
Why does the dollar rise in a crisis?
Global borrowers need dollars to repay dollar debt and investors buy US Treasuries.
Did the dollar smile work in 2020?
Yes. The broad dollar rose about 8% in March 2020 as the VIX hit 82.7.
When did the dollar smile fail?
In April 2025, when a US-centred tariff shock sent the VIX above 50 but the dollar fell.
Is the dollar smile a trading strategy?
No. It is a framework for scenarios; it does not give entry or exit points.
Which dollar index should I use?
The Fed's broad index covers more trading partners than the DXY, which is mostly the euro.
Sources
- FRED: Nominal Broad US Dollar Index (DTWEXBGS)
- FRED: CBOE Volatility Index (VIXCLS)
- Federal Reserve: Foreign exchange rates and the broad dollar index (H.10)
- FRED: US recession indicator (USREC)
Facts checked November 10, 2026. X posts are cited as evidence of the question, not of the answer.