Warren Buffett in his typical love for equity and US market, always warns, *never bet

against America*, and he has been right so far.

Now with global economy undergoing a tough time and all leading central banks fighting an
epic battle to stop the COVID induced economic contraction through money printing, *can
FX world bet against dollar (America) demise? *

While dollar index has weakened almost 6% from its recent high (103), but it has been
muddling around 96/97 for the last one month, at the same level before COVID crisis hit the
world, despite FED adding $3 trillion to its balance sheet since March.

There is an interesting concept known as *Dollar Smile*. As per this, *dollar tends to do well
under two conditions* - when there is economic slowdown/recession in US or when it
outperforms the rest of world in economic growth. Both these conditions lie at the flank of
the smile construct.

*Let's see how this works*

When there is economic slowdown/recession in US, it means less global trade and hence
less flow of dollar, as US runs the world's largest trade deficit and in turn is the largest
exporter of dollar, which is minimum required to keep the global financial market running
smooth *(alternatively known as exorbitant privilege) *. I don't need to highlight how much
of global debt outside of US is in dollar and what percentage of global trade happens in
greenback.

During economic slowdown or recession in US, trade slows down and dollar liquidity gets
impacted, as less trade means lower dollar earnings for RoW (Rest of World) and hence
lower capability by indebted nations or corporates to pay dollar debt or trade payables
denominated in USD. That is why whenever there is a global crisis hurting the flow of global
trade, FED has to wear the hat of a global central bank and become the lender of last resort.

We saw that during 2008 GFC and post eruption of US-China trade war as well. Global trade,
which is almost 75-80% denominated in dollar, becomes the lynchpin for RoW and
especially EM (Emerging Markets) to earn dollar through export to pay their debt/ trade
payables.

*In second case*, when US outperforms the RoW, it is no brainer. Dollar has to do well
because of tighter monetary policy. We saw a glimpse of it when FED hinted at balance
sheet and rates normalization in 2015/16.

*It is only when US economy muddles through* or keep rolling at the bottom of curve,
dollar gets beaten.

Now, in post COVID world, *we have to take view on two things* - how fast US can recover
from COVID impact and which major central bank (FED, ECB, BoE, BOJ or PBOC) will print
more money *incrementally*. Post GFC, it was US which came out of recession faster than
RoW despite it being the epicentre of crisis. *Take your bet rightly*.