Thought March 25, 2020 / 03:21 pm UTC

G7 Lacks Appetite for a New Plaza Accord

By Adrian Schmidt

Speculation about coordinated FX intervention to push the USD lower is circulating, but this does not appear to be a top priority for G7 countries.

There have been some suggestions floating around of a new Plaza Accord to weaken USD. For those who don’t remember, the Plaza Accord was signed on September 22, 1985, at the Plaza Hotel in New York City. The signatories were France, West Germany, Japan, the U.S., and the UK, and the aim was to depreciate USD in relation to the JPY and Deutsche mark by intervening in currency markets. The USD had appreciated sharply between 1980 and 1985 under the fiscal expansion of Reaganomics, but fell sharply after the agreement until it was replaced by the Louvre Accord in 1987.

Source: Macrobond, Continuum Economics, BIS Data

We doubt the conditions exist for a similar agreement this time around. First, the narrow USD index is well below the highs seen before the Plaza Accord—and even below the highs seen in 2016/17. Second, there is no particular interest among the other G7 members to intervene in the markets except for smoothing volatility. If anything, Japan will want to slow any JPY rise rather than encourage it, especially since the rise in the yen from 1985 to 1987 was very painful for the country’s economy. 

Weaker currencies are currently preferred as a form of monetary easing. Unless we see a very much sharper rise in USD, the only country that may want to encourage a weaker dollar is the U.S. Some unilateral U.S. action is possible, but for the moment Washington has much bigger fish to fry. 

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I, Adrian Schmidt, the lead analyst certify that the views expressed herein are mine and are clear, fair and not misleading at the time of publication. They have not been influenced by any relationship, either a personal relationship of mine or a relationship of the firm, to any entity described or referred to herein nor to any client of Continuum Economics nor has any inducement been received in relation to those views. I further certify that in the preparation and publication of this report I have at all times followed all relevant Continuum Economics compliance protocols including those reasonably seeking to prevent the receipt or misuse of material non-public information.