Why the U.S. Dollar Still Smiles

Andrew Watrous, a G10FX Strategist at Morgan Stanley, discusses the "dollar smile" framework—a model explaining the U.S. dollar's behavior under various global growth scenarios. He refutes claims that the dollar smile is broken, citing instances where the dollar strengthened during periods of weak global growth, even when driven by U.S. factors. While acknowledging a recent significant decline in the dollar's value, Watrous maintains that the dollar smile framework remains valid, predicting continued dollar weakness through 2026 due to Fed rate cuts and policy uncertainty. He concludes that despite this, the dollar is likely to appreciate during market volatility.