*Reference to the ‘Dollar Smile’ theory (explained by Macro Man, coined by Morgan Stanley):

One possible explanation is an emerging school of thought that a US recession/quasi-recession is actually good for the dollar. According to the proponents of this theory, weak/negative US growth is both damaging to the rest of the world and a catalyst to encourage US investors to bring money back home. The upshot is that there is less demand for foreign assets/currencies and more demand for US assets/currency; hence, the dollar rallies.

By gauging the sentiment of news flow in the past week, the answer would seem to be no. First, a little history:

The dollar picked up steam back in December once the thesis that the world economy could “decouple” from the woes of the US fell apart — it became clear that the BRIC economies are less equipped to deal with fallout from the credit crisis, and are more likely to default on their own debts. As stated above, this led investors to unwind their investments in emerging markets, and bring them back into US cash (a more liquid asset). Since stocks were tanking, and it became clear the Federal Reserve  intended to suppress interest rates with TALF, many investors sought safety and bought US bonds — to at least yield some sort of return while on the sidelines. Since March 9th (the recent bottom in equities), there has been a departure from risk aversion, and more investors have sought the same risk they did last summer.

here’s a chart of the MSCI Brazil index (a basket of stocks which are representative of Brazil’s economy:

Here’s how the 10-year note has performed in the same time:

Yields have gone up (which means people are selling) while emerging markets are attracting new capital. The dollar has also weakened – although slightly – which raises the question of a weaker dollar going forward with rising inflation expectations.