“No one would want to invest in a currency going to hell.”
This was what Warren Buffett said upon stepping down as chief executive officer (CEO) during the Berkshire Hathaway shareholders meeting held in Omaha on May 3. Buffett referred to the U.S. dollar as a 'currency going to hell.' It was a warning that the value of the dollar could weaken further as the tariff war undermines it.
The outlook for a weaker dollar stems from declining confidence in the U.S. dollar. Concerns about a decline in the U.S. credit rating, a plunge in the prices of Government Bonds, and mounting fiscal deficits are fueling investor anxiety. Recently, there is also analysis indicating that as U.S. stocks, Government Bonds, and the dollar have all shown weakness simultaneously, confidence in all U.S. assets, which had been considered 'safe assets,' is wavering.
The Trump administration is bringing the exchange rate card to the tariff negotiation table. This is a strategy to lower the value of the dollar and pressure trading partner countries to raise their currency value. The calculations suggest that inducing a weaker dollar would enhance the competitiveness of U.S. manufacturing, increase exports, and reduce the trade deficit. Experts have analyzed that the U.S. is leveraging tariffs to summon counterparties to the negotiating table and extracting additional concessions on exchange rates.
Choi Ye-chan, a researcher at Sangsangin Investment & Securities, noted, 'While the Trump administration claims to want a strong dollar, it is likely to induce a weaker dollar to improve the trade balance,' and added, 'It aims to capture both 'maintaining dollar hegemony' and 'a weak dollar' through a weaker dollar resulting from falling U.S. Treasury yields.'
Markets are also saying that today's U.S. asset market is similar to the 1970s 'Nixon Shock.' At that time, President Nixon suspended the gold standard, severing the link between the dollar and gold, which caused the dollar's value to plummet and jolted the global reserve currency system. As confidence in the reserve currency was undermined, gold prices skyrocketed 24 times over eight years, drawing attention to U.S. overseas assets and the defense industry.
This is similar to the current situation. Recently, as confidence in the status of the U.S. dollar as a reserve currency has been shaken, gold prices have surged over 20% compared to the beginning of the year, setting a new all-time high. Global investors are reducing their dollar assets and transitioning funds to alternative investments such as gold, overseas assets, and the yen, engaging in 'Sell America.' Indeed, this year, the dollar index (DXY) has fallen more than 8%, while defense industry-related stocks are showing a clear upward trend.
Experts warn that, based on past cases, the dollar's weakness could persist for a long time. The real effective exchange rate (REER), which represents the real purchasing power of the U.S. dollar, has steadily declined from the low 110s in the early 1970s to the 80s in the early 1980s over nine years after the Nixon Shock.
Baek Seok-hyun, an economist at Shinhan Bank, advised, 'To manage exchange rate risks, it is important to incorporate overseas assets such as U.S. stocks or Japanese real estate as major assets in the portfolio, treating exchange rates as a secondary variable.' He explained that it is preferable to invest in assets that are indirectly exposed to exchange rate fluctuations, such as currency-exposed products, rather than directly investing in dollars to seek currency gains.
Baek added, 'However, choosing exchange hedge products just because the exchange rate risk is high is not appropriate from a long-term investment perspective,' stating that, 'Rather, by investing in overseas assets with exchange rate risks, one can protect won-denominated assets in the long term and also expect a risk diversification effect across the overall portfolio.'