What is the 'Dollar's Smile'?

Brief explanation about Dollar's Smile.
U.S dollar tends to increase in value when the world economy is extremely weak or U.S economy becomes exceptionally stronger than other countries.
Suppose that there is a straight line. Two factors I mentioned above are at the end of the line which drags it upwards. Then the middle point would be relatively low which makes the figure looks like a smile. Let me give you three examples that influence on the moves of U.S Dollars.

1. When the U.S. economy is weak.
During the lowest bottom of real economy when the number of COVID-19 confirmed cases has spread, US Dollars became relatively stronger than other currencies. It is due to the increase in investors who are looking for the safest securities. Secured assets are mostly in U.S, so investors borrow or exchange into the dollars. Dollar's value surge up consequently. In extremely worst cases, investors withdraw cash from the safest assets such as U.S treasuries, which makes currency precious. (Cash is very important to compensate margin for leveraged loans. Margin calls are the most frightening signals for investor in risk of liquidation from investment bank.)

2. When U.S economy is stronger than other countries.
In fact, there are two cases that drive demand for U.S dollars. First, when U.S stock index rallies, investors all around the world will try to borrow dollars to buy the risky assets. When the economy overheats, FED will likely to increase FFR (Federal Funds Rate), which will look treasury bond attractive as yield increases. (Chance to buy bonds at relatively cheaper price) Recent days during FOMC, Fed announced to remain interest rate low until the inflation rate overshoots above 2% target.

3. When global growth especially on emerging countries strengthens.
Investors are on risk-on mode during the season when growth on global market boosts. Investors will look for more risky assets to have more capital gains and profits. Investors will sell safe-haven assets such as treasuries (bond, note, and bills) and exchange into risk currencies.

FYI: US dollar becomes strong during recession in US for two reasons.

1. When U.S consumption economy drop, then their import drops. This will lead to trade deficit drop. Supply of Dollar will drop which affects surge in USD.

2. U.S banks or financial institution will secure cash, which will lead to damage on carry trade investment. (In case of bank run) When U.S withdraws cash, then USD will be stronger. Other countries will suffer due to foreign exchange outflow.

Source 1: What Is the Dollar’s ‘Smile’?
https://www.wsj.com/articles/what-is-the-dollars-smile-11591539293#:~:text=The%20dollar%20smile%20is%20a,the%20smile%20on%20your%20face.

Source 2: Fed’s Kaplan Open to Overshooting Inflation Target to Provide More Support
https://www.wsj.com/articles/feds-kaplan-open-to-overshooting-inflation-target-to-provide-more-support-11594995860