US dollar and interest rates: US dollar, rising bond yields risk causing havoc for sharemarkets

The mood in global equity markets remains ebullient as investors quickly absorbed the US Federal Reserve’s message that US interest rates will stay higher for longer, and instead rejoiced that Fed boss Jerome Powell showed little enthusiasm for rate hikes.

But some analysts warn that investors are failing to recognise two lurking dangers that could scuttle the US sharemarket’s rally. But this leaves them exposed to losses when the yen falls sharply against the US dollar, which could more than wipe out the profits they’re making from buying higher-yielding US assets.

The US share market is at risk of a brutal sell-off when future earnings for big US multinationals are ratcheted lower.When these foreign currencies are weakening against the greenback, this depresses revenues and profits when they’re translated into US dollars. The effect is particularly noticeable for firms that are heavily reliant on foreign sales, such as the big US tech firms.

And this leaves the US sharemarket at risk of a brutal sell-off when future earnings for big US multinationals are ratcheted lower.The yield on benchmark US 10-year bonds has now climbed to 4.6 per cent. Although that’s below last year’s peak of around 5 per cent, it is still close to a two-decade high.

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