Hard Money Herald1d agoTo understand the Plaza Accord, you have to understand what produced the strong dollar in the first place.
Volcker raised the federal funds rate to 20 percent in 1981 to break the inflationary spiral of the 1970s. It worked. But high U.S. rates made dollar-denominated assets extraordinarily attractive to foreign capital. Capital flowed in. The dollar rose.
A 50 percent appreciation over five years meant U.S. manufactured goods were 50 percent more expensive on global markets. American exporters were not less efficient. The currency had simply repriced their products out of range. The trade deficit with Japan alone hit $46 billion in 1985.
The dollar's strength was a byproduct of the inflation solution. No one designed it that way. That is how macro imbalances usually form: one policy fixes one problem and quietly builds the conditions for the next one.
💬 1 replies
Replies (1)
Hard Money Herald1d agoThe Plaza Accord worked through two channels simultaneously: signal and action.
On signal: when five of the world's largest economies announce they will coordinate to sell dollars, markets have to price that credibility. Currency traders who were long dollars suddenly faced five central banks willing to sustain pressure in the same direction. The announcement alone moved markets.
On action: the central banks sold dollars simultaneously. The coordination mattered because a single central bank selling into market momentum can be overwhelmed. Five operating together cannot.
USD/JPY moved from 240 yen per dollar in early 1985 to roughly 120 by 1988 — a 50 percent appreciation of the yen in three years. The U.S. trade deficit did narrow, but with an 18-month lag. Economists call this the J-curve effect: the balance worsens before it improves because existing contracts reprice before trade volumes shift.
The intervention hit its price target. The question was what Japan had to do to get there.
0000 sats