Investor/An insider's guide to the market: During 2005, many market participants were wrongfooted by the strong rebound in the dollar. The majority of analysts identified the explanation for dollar strength as the larger than expected rises in US interest rates.

So far in 2006, US short-term interest rates have continued to rise, but the dollar has struggled in the foreign exchange markets. In recent weeks the currency has suffered a series of sharp setbacks, to hit an 11-month low of $1.26 against the euro.

Even though the European Central Bank (ECB) has begun to raise euro interest rates, yield differentials are still strongly in favour of the dollar.

In fact, yield differentials in the bond market have moved further in the dollar's favour in 2006. The yield on 10-year US treasury bonds has moved above 5 per cent and shows signs of going higher. In 2005, yields on US government bonds barely budged, despite the substantial rise in short-term interest rates.

A likely pause in interest-rate rises from the US federal open market committee is the explanation for the emergence of dollar weakness. The view is that short-term US interest rates will peak at or close to 5 per cent and could remain at that level for a prolonged period. In this scenario, further interest-rate rises in Europe, and perhaps a move away from zero interest rates in Japan, will eat away at current favourable dollar interest-rate differentials in the coming months.

While interest rates and bond yield differentials play an important role in exchange rate determination, economic fundamentals such as the balance of payments exert an even greater influence, particularly over the longer term.

The US trade deficit has grown to equal about 5 per cent of US gross domestic product - and there has been no improvement in this deficit over the past year.

Capital inflows into the US have been sufficiently strong to fund this deficit, and there is no sign that such inflows are about to stall anytime soon. Nevertheless, most economists argue that a decline in the dollar exchange rate will eventually occur as a consequence of such a large trade deficit.

With interest-rate differentials likely to become progressively less supportive of the dollar, the recent downtrend could persist for several months. Investor expects that this will indeed be the case, although a sharp fall in the exchange rate is unlikely.

However, this does mean that Irish-based investors, who invest in dollar assets, will have the extra hurdle of a weak exchange rate to overcome. This is already apparent so far this year where a 5 per cent gain in the US equity market translates into a small year-to-date loss in euro terms.

Investment in Irish-quoted shares also involves some exposure to the dollar. Companies such as CRH and Kerry Group derive a high proportion of their profits from US operations. For Kerry Group, US profits account for about 40 per cent of profits, and for CRH the figure is as high as 50 per cent. CRH's profits and share price are therefore vulnerable to a downturn in the dollar.

However, while the volatility of the euro/dollar exchange rate needs to be taken into account in any assessment of CRH, far greater weight should be given to underlying business factors. Internationally diversified companies such as CRH have many tools at their disposal that enable them to manage the risks associated with operating in different economies.

The investment case for CRH is therefore only marginally impacted by the weaker dollar.

Of far greater significance is that the US economy and construction sectors are continuing to perform strongly. In fact, CRH recently announced the acquisition of MMI Products for $350 million (€277 million). This is not a large acquisition by CRH's standards, but it opens up a new area for growth in its US operations, and highlights that CRH's growth prospects continue to be enhanced through its ability to acquire new companies.

With sales and profits to grow smartly over the next one to two years, CRH continues to offer good investment value, even in a weak dollar environment.