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Could the “dollar smile” be fading?

June 04, 2025

Tariff talk and trade tensions in recent months have triggered sell offs of the US dollar. In fact, its value (as of June 2) has declined more than 9% since January, with a 4.5% drop in April alone. Such softening of the world’s reserve currency has led many to wonder if the dollar smile theory is fading. “The US dollar has long benefited from pro-cyclical flows, garnering a risk-on bid thanks to stronger relative growth, and a risk-off bid during flights to safety. The breakdown of that relationship is notable to say the least,” said Garrett Melson, Portfolio Strategist, Natixis Investment Managers Solutions. 

 
Dollar Smile Theory
Dollar Smile Theory Source: Natixis Investment Managers Solutions
  • The dollar smile theory means the USD has tended to benefit in good and bad economic times.
  • Left side: dollar strengthens due to investors’ flight to safety 
  • Middle: dollar weakens due to a lagging US economy 
  • Right side: dollar strengthens due to US economic growth

This material is provided for informational purposes only and should not be construed as investment advice. The views and opinions contained herein reflect the subjective judgments and assumptions of the authors only and do not necessarily reflect the views of Natixis Investment Managers, or any of its affiliates. The views and opinions expressed may change based on market and other conditions. There can be no assurance that developments will transpire as forecasted, and actual results may vary.

All investing involves risk, including the risk of loss. Investment risk exists with equity, fixed income, and alternative investments. There is no assurance that any investment will meet its performance objectives or that losses will be avoided. Investors should fully understand the risks associated with any investment prior to investing.

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