We present a model in which cross-currency basis swap spreads arise from dollar regimedependent hedging behavior by global investors. Using a panel of G10 currencies vis-à-vis the US dollar, we show that, during the LIBOR period, dollar appreciations widen the basis in low-dollar regimes, while their effects weaken or even reverse in high-dollar regimes, resulting in basis tightening. This asymmetry is strongest at the short end of the basis curve, suggesting a particularly important role for short-term funding and liquidity pressures in the observed term-structure response. In the post-LIBOR era, however, these threshold effects become less stable and are often statistically insignificant, possibly reflecting both the shorter sample and changes in benchmark conventions. Our findings reveal the dollar's two-faced nature: similar dollar movements can generate markedly different common G10 basis responses depending on the prevailing dollar regime.
