Bloomberg News reports the dollar’s skyrocketing surge has left few contemplating an unthinkable and rare action. That is the fact that major economies agree to manipulate the US currency until it drops.
History repeats itself: Reminiscence of 1980s
A similar instance has happened before, and notably, it is the Plaza Accord of 1985s, which occurred against a backdrop of inflation that was soaring, an aggressive rate hike campaign of the Federal Reserve, and an increasing dollar. In other words, it is a similar scenario that resembles a lot of the present day. This parallel will not be lost on the Group-of-Seven finance ministers and governors of the central bank that are supposed to meet this week.
The demand for the greenback this year has been relentless. The consequences of escalating interest rates in the United States compared to the other developed economies, and the Ukraine war caused a stampede to the safer haven. The 6.3% surge of the dollar is clobbering the yen to a two-decade low and has resulted in the euro being put almost back to 1-to-1 parity with the currency of the United States for the first time since 2002. Investors have been found lasering on the yen, thereby tumbling to 150 per dollar and the euro dropping below 90 cents as the potential line in the sand.
Peer pressure
There are parallels to the currency of the United States’ strength back in 1985 and now: the trade-weighted dollar index of the Federal Reserve has surged at an annualized clip of 14% till now this year, which is said to be quicker in comparison to 12% pace as seen in the five years that are leading up to the accord.
According to Bloomberg News, US inflation is at an all-time high and the hottest since the 1980s, when Fed Chair Paul Volcker increased rates to as high as 20%, and the present head Jerome Powell vowed to do whatever it takes to curtail faster price growth.
However, a bona fide Plaza Accord II is hanging on American involvement. The deal of 1985, the namesake of which is the famous Plaza Hotel in New York, the venue where the conference had taken place, was inked only when the second Reagan administration viewed the foreign exchange intervention in a favorable light, thereby underscoring the difficulty in coordinating major agreement without American support.
The rise of China in the global markets is also a factor. Beijing will have to agree to any coordinated action of the central bank. However, the yuan is not currently trading at levels that need intervention as per GAMA.
If there is a contraction in the US economy and a persistent hobble by the greenback right from trade to employment, the reticence could change. The possibility of a recession in the next year is 30%, which is the highest since 2020, as per the survey by the economists of Bloomberg.
Most major currencies are pretty far from the crisis levels that necessitate another Plaza Accord. However, it cannot be ruled out completely.
