The US dollar is facing a bumpy ‘yo-yo’ ride

To US President Donald Trump, the dollar is like a yo-yo that he can make go up and down.

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A weaker dollar leads to American assets becoming less attractive, slowing the flow of funds into US firms and driving money to international markets. US producers have to pay more for input materials made abroad.

(PHOTO: REUTERS)

To equity investors, the toy looks broken - and a weaker dollar is now the latest obstacle they have to contend with when valuing stocks.

It has drawbacks. American assets become less attractive, slowing the flow of funds into US companies and driving money to international markets. US manufacturers have to pay more for input materials produced abroad, potentially importing inflation for end products sold at home.

Mr Trump insists he’s not worried about the dollar, no matter its latest slide - a comment that spooked forex traders and, eventually, led Treasury Secretary Scott Bessent to reiterate the longstanding policy that Washington favours a strong currency. The greenback jumped on Jan 30 by the most since May, but still, it remains sharply lower than a year ago, and that has implications for equity traders.

“Having a weakening dollar is a net negative for the US stock market,” said Mr Chris Zaccarelli, chief investment officer at Northlight Asset Management.

He expects investors to reorient their portfolios to overweight export-oriented US stocks. And why not? Since the market bottomed on April 8, a Barclays basket of companies that benefit from a weak dollar has soared 70 per cent compared with 39 per cent for the S&P 500. A basket of firms that benefit from a strong currency is up just Il per cent.