Plaza Accord

Deciphering the Plaza Accord: Impact on Global Currency Markets

Exploring the Plaza Accord and its Effects on International Trade

The Genesis of the Plaza Accord

The Plaza Accord, signed in 1985 among the G-5 nations, aimed to rebalance global trade by depreciating the U.S. dollar against the yen and Deutsche mark. This landmark agreement, named after the iconic Plaza Hotel where it was forged, sought to address burgeoning trade imbalances.

Key Takeaways

The Plaza Accord targeted the U.S. dollar's depreciation to alleviate trade disparities.
Signatories included France, Germany, the U.K., the U.S., and Japan.
Unintended consequences included Japan's economic downturn, known as the Lost Decade.

Understanding the Accord's Mechanisms

Central to the Plaza Accord was a concerted effort to devalue the U.S. dollar. Through coordinated policy measures, the U.S., Japan, and Germany committed to fiscal and monetary adjustments. Currency interventions were deployed to rectify current account disparities exacerbated by the dollar's strength.

Impact on Currency Markets

Post-Plaza Accord, the yen and Deutsche mark soared, while the dollar depreciated by over 25%. Although the Accord partially mitigated the U.S.-Japan trade deficit, its effectiveness varied. However, it stabilized the U.S. current account balance and even yielded a slight surplus by 1991.

The Louvre Accord: A Sequel to Plaza

With the Plaza Accord achieving its objectives by 1987, the Louvre Accord was enacted to stabilize exchange rates. This subsequent agreement aimed to counter further dollar depreciation and maintain currency stability among the signatory nations.

Japan's Journey Post-Plaza Accord