Rate differentials explain the dollar until risk appetite takes over

Most of the time the dollar follows the gap between US interest rates and everyone else's. In a scare it follows fear instead, and the rate model that worked for months suddenly stops explaining anything.

Two regimes

In calm markets, capital goes where the yield is, and the dollar tracks rate differentials closely. In stressed markets, capital goes where the safety is, and the dollar rises as a haven regardless of rates. The switch between the two can be abrupt.

Positioning built on the first regime tends to be hurt badly by the second.

What I'm watching

• Two-year rate differentials against the major currencies
• Equity volatility, the usual trigger for the haven regime
• Dollar funding costs abroad, which spike in stress

Where I stand

Flat. The rate story points one way and the risk backdrop could flip the regime without warning. Neither is strong enough to lean on alone.

What would change my mind

A sustained move in rate differentials with volatility staying low. That is the calm regime with a clear signal, and the one environment where the rate model earns trust.