Currency & the dollar
Place six moments on the smile
Two forces push the dollar up. US exceptionalism: when US growth or rates exceed the rest of the world, global capital flows in — buy dollars to buy US assets. Flight to safety: when global investors are scared, they want US Treasuries, the deepest safe-asset market on earth — buy dollars to buy them. The two forces are roughly orthogonal, so the dollar can rally in growth-led or fear-led regimes. The boring middle (US average growth, calm world) gives no buyer special reason — dollar drifts.
US tech boom, productivity miracle, Greenspan keeping rates higher than Europe and Japan. Pure US-exceptionalism regime. DXY climbs from 80 to 120 over six years. The same period punishes Asia (1997), Russia (1998), Argentina (2001).
The US is the epicentre of the crisis. Lehman bankruptcy, banks failing, Fed flooding the system. Yet the dollar rallies hard. Why? Because the world's offshore dollar funding system is short dollars: every European bank holding US mortgage-backed securities funded them in short-term dollar markets. When those markets froze, they had to buy dollars to roll their funding. Risk-off rally. The Fed eventually had to provide $500bn+ in central-bank swap lines just to put a lid on it.
Same shape, faster. Three weeks of dollar spike as everyone hoards. Fed re-activates and expands swap lines. Crisis abates by April. The bullet was the same one as 2008 — the dollar funding system is permanently fragile because every non-US bank is structurally short dollars.
Fastest hiking cycle in 40 years. Ukraine war means Europe gets the energy shock first. Both forces push dollar up at once: high US rates pull capital in, geopolitical fear pushes the rest. DXY hits 114. Yen falls 30% in a year. Sterling almost breaks. EM debt distress everywhere.
When the dollar is rallying, EM is in pain.
If you hold EM equities, EM debt, commodities, or anything dollar-funded, watch DXY. A 5-point move (e.g. 100 → 105) is meaningful; a 10-point move is regime-changing. The mistake is to think a strong dollar means "things are good in the US." Sometimes — and sometimes the dollar is strong precisely because things are bad somewhere else.