The Plaza Accord

Ichiro Suzuki

On September 22, 1985, G5 (the U.S., the U.K., West Germany, France and Japan) finance ministers gathered at the Plaza Hotel in New York, and agreed on weakening the overvalued U.S. dollar through concerted interventions in the foreign exchange market. The dollar was on a very strong uptrend since the beginning of the 1980s. Federal Reserve Bank chairman Paul Volcker took his job seriously and fought the raging inflation with aggressive tightening of money, even at the expense of two recessions in five years. President Ronald Reagan made sweeping changes on taxes, true to his campaign promise. Lower taxes stimulated demand once the inflation became under control, sucking foreign capital into U.S. assets, thus pushing the dollar to rise. The U.S. began to prosper, leaving the dismal 1970s behind, even though further deterioration was witnessed in fiscal and trade deficits that Reagan vowed to solve originally. The devaluation attempt at the Plaza delivered spectacular results. The next two years, the dollar fell like a stone against other hard currencies. 

In January 2025, Donald Trump came back to the White House with his immense dissatisfaction in trade deficits as well as the levels of the dollar. He has a strong, and misguided, belief that other countries are trying to screw the U.S. through trade. In order to correct the deficits, Trump went on a binge of imposing tariffs through bilateral negotiations. It remains to be seen if tariffs really reduce U.S. trade deficits over a medium to long terms though the vast majority of economists don’t agree with the President. Trump hasn’t said much about foreign exchange rates, but he appears to think lower interest rates lead to lower value of a currency, if other things are equal. Over a long period of time, however, trade account performances are influenced by domestic savings a great deal more than trade policies. China, Japan and other Asian countries as well as Germany have a high propensity to save than American households for a variety of reasons but definitely because of people’s greater worries about their future in the case of China and Japan. Worrying about rainy days, they deposit their money with banks, which in turn lend the money to build factories or to finance real estate development, etc. Surplus capital can be exported into countries where expected returns seem higher, and the U.S, has been the No.1 destination of such money. Such flows underpin the dollar, to the detriment of exporters in the U.S. Trump’s trade deals often include partners’ massive investments into the U.S. Such capital inflows are contradictory to his wish of having a weaker currency to be competitive in international trade. 

The Trump administration aims wholesale realignment of the international system that stands since the end of World War II. Far reaching goals include devaluation of the dollar while the greenback holding onto the dominant reserve currency status, reducing trade deficits and redesigning security arrangements. Put these altogether, its policy goals were dubbed as the Mar-a-Lago Accord in the early days of the second Trump administration. Of the elements in this accord, trade and security can be negotiated with partners and the White House’s will can be imposed on them though there is no guarantee that the deals reduce trade deficits. Levels of exchange rates and the reserve currency status are essentially matters of market forces. It takes confidence and trust to have market forces on its side, and they have to be earned. 

The dollar can weaken structurally if it becomes relatively less appealing to foreign investors. In 2003-07, rise of China drove currencies not only of China but also of other emerging countries that were believed to be beneficiaries of the booming Chinese economy. Such flows reversed positions built on the dollar in the late 20th century ‘New Economy’ boom. The euro also rose because of Europe’s large exposure to emerging economies. While China doesn’t seem to repeat that boom, the dollar could weaken if the market begins to think the U.S. economy’s superior performance over others has run as far as it can, and the relative performance gap is set to narrow. Reversal of the dollar’s dominance in the 2020s could trigger fast departure from the greenback. Trump might have his wish granted, though it might be rather disorderly. Military might greatly underpins the reserve currency status. While the U.S. is probably overextended militarily, blatant retreat from the role the country has played in the last 80 years is going to make a dent in credibility attached to the dollar and hence negatively affects its status as a dominant reserve currency. 

Forty years later, Plaza Accord-style concerted interventions do not seem likely. The foreign exchange markets have grown exponentially since then and are far too large to be bent to the will of the leading central banks. Trump’s trade deals include partners’ tens of billions of dollars investments. The dollar’s disorderly fall for whatever reasons would incur heavy foreign exchange losses on the part of the investors into the U.S. Such losses, however, could be considered a price to be paid for the privilege of doing business with the U.S. in the climate of the 2020s. The original form of the Mar-a-Lago Accord required allies to invest in hundred-year Treasury bonds in turn for security protection by the U.S. That, however, seems over the top and pledges into the U.S. are more acceptable to the allies, it seems. Forty years after the Plaza Accord it is a different world. 

About the author: Mr. Suzuki is a retired banker based in Tokyo, Japan.