Why U.S. Stocks Are Climbing While the Dollar Weakens

A sharp rise in U.S. policy uncertainty has prompted investors to reassess their considerable overweight positions in U.S. assets. It has also sparked debate about the U.S. dollar’s role as the world’s primary reserve currency. How might these changes impact your own investment decision-making?

You’ve probably noticed something curious: the U.S. dollar has been losing some of its shine, yet U.S. stocks continue to climb. At first glance, this seems contradictory; after all, a weaker dollar often signals uncertainty. So why does the stock market seem almost “immune” to the dollar’s weakness? Let’s break it down.

Global Investors Are Hunting for Growth

International investors have been drawn to U.S. stocks for over a decade, since they have continuously outperformed their global counterparts. Foreign investors continue to pour money into U.S. stocks despite the dollar’s decline due to the nation’s strong corporate earnings, high real yields, and room for expansion. In other words, a weaker dollar keeps demand and stock prices high by making U.S. assets more accessible to foreign investors.

Corporate Buybacks Support Stocks

Most of the big U.S. corporations actively buy back their own stock. Those buybacks trim the outstanding number of shares, usually increasing earnings per share and supporting stock prices. That shareholder support can keep stock prices afloat even when macroeconomic forces, such as a lower dollar, would tend to weigh them down.

Currency Carry Trades and Capital Flows

Carry trades play a quiet but significant role in this situation. Investors can borrow in currencies with low interest rates and invest in assets with higher returns. This movement of capital can put downward pressure on the dollar while still keeping U.S. equity prices stable, creating a situation where a weak dollar exists alongside a strong stock market.

Market Psychology and Momentum

Markets aren’t just driven by numbers; they are influenced by sentiment. Strong earnings, technological innovations, and optimism within industries can fuel self-reinforcing rallies. Investors may buy stocks simply because others are doing so, creating momentum even when the dollar is weak.

A Broader Context: Inflation, Interest Rates, and Policy Uncertainty

Interest rate policies, inflation expectations, geopolitical events, and changes in policy all affect the dollar’s value. Recent increases in U.S. policy uncertainty have shaken confidence, leading some to rethink the dollar’s role as the world’s reserve currency. Still, the U.S. remains a key global market, and these forces do not necessarily indicate a stock market crash — they highlight the importance of diversification and smart positioning.

So, What to Do Next?

A weaker dollar doesn’t automatically mean falling stocks. Global investor behaviour, corporate buybacks, carry trades, and market psychology all prop up U.S. equities. That said, it’s a reminder to stay vigilant, consider currency risk, sector exposure, and interest rate shifts in your portfolio planning.

We continue to see U.S. assets as critical, core allocations to portfolios. But some pivot back toward more globally diversified portfolios may play out in the year ahead. One straightforward approach to position for this potential scenario: shift some of your investments into international markets that aren’t denominated in U.S. dollars, focusing on deep and liquid markets such as Europe and Japan. This can help diversify sources of return in your portfolio.

In this changing market, understanding the factors behind a weak dollar and a rising stock market can help you make better investment choices. A personalised investment strategy that aligns with your goals, risk tolerance, and financial situation can equip you to manage uncertainties while seizing opportunities.

Disclaimer:‍‍‍‍‍‍ Investment carries certain risks. You should not just rely on results as an indication of your financial needs. You should understand and familiarise yourself with any investment and the associated risks before investing. You are also recommended to seek professional advice before making any decision to buy, sell or hold any investment or insurance product. The views and thoughts expressed in the post belong solely to us, and not to Manulife Financial Advisers Pte Ltd, or any other group of individuals.