The skyrocketing rise of the dollar is something rare, if not unthinkable, thinking of action: major countries agree to manipulate until the US currency falls.
This has happened before – especially with the Plaza Accord of 1985 – which took place against the backdrop of rising inflation, an aggressive Federal Reserve rate-raising campaign and a rising dollar. In other words, a scenario that looks a lot like today – a parallel that will not be lost as the Group of Seven meets with finance ministers and central bank governors this week.
Demand for greenbacks has been relentless this year, with interest rates rising sharply in the U.S. compared to other developed economies and the war in Ukraine being trampled underfoot. The dollar’s 6% rise in five months has pushed the yen to a two-decade low and for the first time since 2002 brought the euro back to a 1-to-1 parity with the US currency.
For Stephen Miller, a four-decade market veteran and former head of fixed-income Sydney-based BlackRock Inc., the situation is now reminiscent of his time as a young buck at the Australian Treasury Department, where he sat in the front row at the Plaza Accord inauguration.
Through that agreement, France, Japan, the United Kingdom, the United States and West Germany agreed to weaken the dollar – a belief that the dollar’s massive move is hurting the world economy.
“One of the options on the bottom of the track could be some kind of coordinated intervention,” Miller said, now an investment consultant at GSFM, a unit of CI Financial Corporation of Canada that oversees approximately $ 289 billion in assets. “Markets acknowledge that central banks are in a bind when they only get to push the lever of interest rates, so the market is already thinking about this kind of situation, including the Plaza Accord-style move.”
Of course, no one is predicting impending intervention at this stage. US support will be crucial for any effective deal and it is not possible in the short term, because the strength of the dollar is making imports cheaper – an attractive feature in an era of high inflation.
Still, finance experts see pain points for countries outside the United States that could raise the drumbeat for integrated intervention.
According to Alan Ruskin, chief international strategist at Deutsche Bank AG, if the euro falls below 0.90 against the dollar – currently around 1.05 – it could “start to raise fears”. Rajiv de Mello of GAMA Asset Management sees the yen fall to 150 – a level that was seen in the late 1990s – as a potential trigger. The reckless rise of the dollar could be a game changer, says Zach Pandel, a strategist at Goldman Sachs Group Inc.
Peer pressure
There must be a parallel with the strength of the U.S. currency in 1985 and now: the Federal Reserve’s trade-weighted dollar index has risen 14% year-on-year so far this year, faster than the 12% pace seen in five years.
US inflation has been at its highest level since the 1980s, when Fed Chair Paul Volker raised rates to 20% and current chief Jerome Powell has vowed to do what he can to curb rapid inflation.
“Of course this is something to consider, especially if we see crashes in other currencies,” said De Mello, Gamma’s global macro portfolio manager in Geneva. A “huge” deviation in monetary policy could trigger such a collapse, prompting the Japanese to say “our yen has fallen too much” and other countries will be worried about the dollar. ”
But a truthful Plaza Accord II hangs over American involvement. The 1985 agreement was signed shortly after the second Reagan administration viewed foreign exchange intervention in a more favorable light, emphasizing the difficulty of coordinating any major deal without American support.
Another reason for China’s rise in the world market. Beijing will probably have to agree to any concerted action by the central bank, but the yuan is not trading at a level that would require such intervention at the moment, according to Gamma.
“I’m having a hard time seeing the possibility of a concerted intervention at the moment,” said Jane Foley, head of foreign-exchange strategy at Rabobank in London. “Why would the Fed tighten the financial position on the one hand and then intervene against the dollar and relax them on the other?”
This is a sentiment shared by Colin Graham, head of the Robeco Group’s multi-asset strategy.
“A stronger dollar strengthens the financial position and it will help,” said Fed’s policy director, Graham. “Obstacles to concerted action are still too great.”
Depression
This restraint could change as the US economy shrinks and the ever-strong greenback disrupts everything from employment to trade. According to a survey by Bloomberg economists, the probability of a recession in the coming year is 30%, the highest since 2020.
While far from the level of most major currency crises that would require another Plaza Accord, it cannot be completely blown away, says Jack McIntyre of Philadelphia-based Brandywine Global Investment Management.
“Could this happen? Yes, perhaps, especially if the United States enters a recession and a strong dollar hits the labor market, “he said. “It simply came to our notice then. I see the dollar weaken at some point – but you never say. ”
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