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Chapter 27, Part II. Dollar Index – continued… Page 2

Discussion in 'Complete Trading Education- Forex Military School' started by Sive Morten, Dec 26, 2013.

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  1. Sive Morten

    Sive Morten Special Consultant to the FPA

    Aug 28, 2009
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    Dollar Smiley

    Pipruit: Sir, that’s very interesting about the Index dollar and all this stuff, but keeping in mind all things that we’ve discussed in recent time – I mean fundamental analysis, carry and index, I’ve come to some conclusion...​

    Commander in Pips: Well, that’s interesting to hear….

    Pipruit: Well, my theory has three phases and is based on some thoughts about investors behavior in different situations. The first phase is a dollar growth (and USDX, I suppose), that is based on risk aversion. You’ve said once, that the USD is one of the safe havens, so when problems have started – investors start to buy dollars to get return OF the investments rather than return ON the investments. This capital flow then forces the USD to rise.

    When this overflow comes to an end and all who wants to buy US Dollars have done this – Then the second stage comes. This stage is dollar decreasing, since the economy falls into recession.

    The third stage comes when the US economy starts to grow and gradually leave recession and turns to growth. At that stage investors reduce their risk aversion, take it more and start to invest money in US assets. This increase demand for US Dollars and forces USD to rise. A bit later Fed starts to to raise rates and that also supports the dollar’s growth.

    What do you think about this stuff?

    Commander in Pips: Brilliant!

    Pipruit: Are you kidding?​

    Commander in Pips: No, I’m speaking absolutely seriously. Still I have to upset you.

    Pipruit: Why?​

    Commander in Pips: This theory has been invented a bit earlier that you’ve done it – by a wise man from Morgan Stanley and his name is Stephen Jen. He has called this theory the “Dollar Smile theory”. Now this theory is very popular and is treated as classical.


    Pipruit: Looks funny.
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