With the U.S. Dollar continuing to rise to record levels, will we see a Plaza Accord 2.0?
Nearly 40 years ago, there was an agreement to lower the value of the US Dollar after it had gotten stronger vs. other G5 currencies.
In the early 80s, the U.S. Central Bank (The Fed) raised interest rates to combat the inflation that plagued the U.S. (and other nations) in the 1970s.
It worked, however, it created a big gap between the exchange rates of the U.S. vs. other nations we traded with (the G5 nations).
This gap made American products very expensive in other countries, which damaged sales significantly.
U.S. businesses asked the government to intervene, and in 1985, global leaders of G5 nations met at the Plaza Hotel in NYC to make an agreement.
The leaders of France, Germany, the U.S., the U.K. and Japan agreed to devalue the U.S. Dollar against the German Mark and the Japanese Yen.
The accord was successful, and had a positive impact on trade with Germany.
However, it had a negative effect on the Japanese economy.
Exports of Japanese products suffered, and this led to a 10 year period of low growth & deflation in Japan.
The 2022 global financial situation is similar to the conditions that led to the Plaza Accord, however, there is one MAJOR difference.
China.
Back in the mid-1980s, China was not the leader in global trade that it is today.
This means that it’s not likely to have a currency revaluation without China’s participation.
China exports a large volume of products, and would not benefit from making the dollar cheaper (which would make the Yuan more valuable as a result).
People around the globe who buy Chinese products (which is most of the industrialized world) would have to pay more for the same products if the dollar were devalued.
Considering that China is not likely to agree with a Plaza Accord 2.0, this makes a new version of the Plaza Accord unlikely (unless it was structured VERY differently).
China has aligned with the BRICS nations to create a new reserve currency using a basket of inputs (including assets such as gold), which indicates their goal is to move away from the Dollar.
A new BRICS currency would likely decrease demand for the dollar (fewer nations would have to buy Dollars for trade), which would lower its value.
So the devaluation of the dollar may happen at the hands of China, but for a different reason.
There is a possibility that if there was a financial collapse that disrupted global trade in a big way, nations would revalue their currencies to support a “reset”. But it would likely be structured very differently than the agreement in 1985.