Short Description:
The Plaza Accord of 1985 shows governments can join forces to weaken an overvalued currency. Learn what made it work, its impact on the dollar and yen, and why a “Plaza 2.0” is so difficult today.
Read Time: 4 minutes, 15 seconds
Main Article:
The Plaza Accord remains the most definitive example of coordinated foreign exchange (FX) intervention in modern history. In 1985, with the US dollar having surged 44% and the US trade deficit hitting a record $122 billion, political pressure for protectionist measures was mounting. The G5 nations—the US, Japan, West Germany, France, and the UK—signed an agreement to engineer an “orderly” depreciation of the dollar. This wasn’t a simple market manipulation; its success hinged on altering market expectations through a credible mix of public messaging, FX intervention, and aligned fiscal and monetary policies. The goal was clear: restore US price competitiveness and defuse a looming trade war by tackling the currency misalignment head-on.
The results were dramatic. From 1985 to 1987, the dollar fell roughly 40% on a trade-weighted basis. The most striking move was in USD/JPY, which plummeted from around ¥242 to near ¥120 by 1988. This “yen shock” forced Japan’s export-driven economy to adjust and is often linked to the subsequent easing policies that contributed to its asset bubble era. The accord’s legacy is a reminder that durable FX shifts require more than just talk; they need a credible, coordinated policy shift that markets believe in. This effectiveness led directly to the 1987 Louvre Accord, which aimed to stabilize exchange rates and prevent an overshoot, completing the cycle from forceful realignment to managed stability.
Today, whispers of a “Plaza Accord 2.0” emerge during periods of extreme dollar strength, but a true replication faces steep hurdles. The global foreign exchange (FX) market is vastly larger and more complex, China’s central role in trade adds a geopolitical layer absent in 1985, and modern central banks are more constrained by independent inflation mandates. For traders and policymakers, the enduring lesson of the Plaza Accord is diagnostic: a lasting US dollar regime change requires the currency’s strength to become a shared political crisis, backed by a cohesive and credible policy mix among major economies—a much higher bar in today’s fragmented world.
Short Summary:
The 1985 Plaza Accord successfully weakened an overvalued US dollar through coordinated G5 action, combining FX intervention with policy credibility to avert a trade war. Its legacy teaches that lasting currency realignments require shared political will and aligned policies—conditions that make a modern “Plaza 2.0” difficult despite recurring dollar strength. Understanding this history is key for navigating today’s complex forex and trade debates.
