ALEX BRUMMER: The steps taken in 1985 by powerful financial leaders contrast with the lack of public reaction to the dollar’s current destructive trajectory

On a balmy Sunday in September 1985, while I was working as a correspondent in Washington, I received a call from a colleague at the FT who suggested that perhaps I should go to New York. The financial leaders of the big five developed economies held an unscheduled meeting.

We headed to the Plaza Hotel in Manhattan. Upon arrival we asked where the meeting would be held and were directed to a room on the top floor.

There we bumped into Paul Volcker – then chairman of the Federal Reserve System – and out of the corner of my eye I caught a glimpse of British Chancellor Nigel Lawson.

Quick overview: The pound has fallen 11 percent against the dollar this year alone

We realized that we had accidentally broken down a gate that would later become iconic in world financial history and left the room. We joined other waiting journalists in the basement Oyster bar before being summoned to an impromptu briefing late into the evening. The Plaza meeting was convened by US Treasury Secretary James Baker and his deputy Richard Dorman after a series of secret and informal meetings in Japan and Europe.

The surge in the dollar was creating a serious imbalance for the world economy, and it was decided that after a period of free circulation of world currencies – without central bank action – the policy needed to be changed.

The decisive steps taken 37 years ago by strong and dedicated financial leaders contrast with the lack of public response to the dollar’s current disruptive trajectory. This year alone, the pound sterling has fallen by 11 percent, the euro by 11 percent, and the Japanese yen by a whopping 15 percent.

At the Plaza, Japan committed to tax reform to boost domestic investment, and Germany, after some cajoling, agreed to be labeled a “surplus” country.

All five countries – the US, Germany, Japan, France and the UK – agreed to launch a joint plan to bring down the value of the dollar through coordinated intervention.

The area was critical in two ways. It meant a new period of economic coordination of the great economic powers of the time. And it demonstrated the willingness of central banks to act in an era of floating exchange rates.

More recently, similar coordinated actions were considered during the great financial crisis that unfolded in the fall of 2008. And at the beginning of the pandemic in March 2020, when there were joint actions to reduce interest rates and increase the scale of bond purchases. The new currency swap arrangements were anchored as a defense against global disruption.

Anyone following the market narrative in recent weeks might think that this year’s fall in the pound was a uniquely British event, dictated by Brexit, Boris Johnson’s donation and the UK’s suboptimal balance of payments.

This does not explain why the yen is at its lowest level in a quarter of a century and the euro is almost at parity with the dollar.

European and Japanese central banks have been slowly raising interest rates, creating a gap with yields on US Treasuries and their foreign counterparts. The Bank of England’s chief economist, Hugh Peel, also noted that US energy self-sufficiency is a dividing line.

Sharp divergences in currencies and exchange rates among G7 economies are leading to trade imbalances, exacerbating protectionist instincts and delaying post-pandemic recovery. Therefore, another Plaza is needed.

With the moribund Joe Biden administration, it’s a different matter.


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