Blog Post - Views on the Economy and the World

Does the Dollar Need Another Plaza?

| Mar. 23, 2015
We are at the 30th anniversary of the 1985 Plaza Accord.  It was the most dramatic intervention in the foreign exchange market since Nixon originally floated the US currency.   At the end of February 1985 the dollar reached dizzying heights, which remain a record to this day.  Then it began a long depreciation, encouraged by a shift in policy under the new Treasury Secretary, James Baker, and pushed down by G-5 foreign exchange intervention.  People remember only the September 1985 meeting at the Plaza Hotel in New York City that ratified the policy shift; so celebrations of the 30th anniversary will wait until this coming fall.

The dollar has appreciated sharply over the last year, surpassing its ten-year high.   Some are suggesting it may be time for a new Plaza, to bring the dollar down.   In its on-line “Room for Debate,” the New York Times asked, Will a strong dollar hurt the economy and should the Fed take action?”   Here is my response:

Any movement in the exchange rate has pros and cons.  When the dollar appreciates as much as it has over the last year, the obvious disadvantage is that the loss in competitiveness by US producers hits exports and the trade balance.   But if the dollar had fallen by a similar amount, there would be lamentations over the debasing of the currency!

Overall, the strong dollar is good news.  This is because of the macroeconomic fundamentals behind it.  Indeed textbook theories explain this episode unusually well.  The US economy has performed relatively strongly over the last year — compared to preceding history and to other countries).  This is why the Fed is getting ready to raise interest rates — again, in contrast to the preceding six-year period of monetary easing and also compared to other countries.  (“Divergence.”)   American economic performance and the change in monetary policy are both excellent reasons for the strong dollar.   These developments should be welcomed, taken as a whole, notwithstanding the effect on exports.

Nevertheless, the soaring dollar – especially if it goes much higher – would be a reason for the Fed to hold off past June on its long-anticipated decision to raise short-term interest rates, so as to avoid a growth slowdown or even a descent into deflation.  I believe the Fed would indeed respond in that appropriate way.   In that sense, although the dollar strength is bad for exporters, it will not be bad for output and employment in the economy as a while.

Might a more aggressive intervention to bring down the dollar be justified, in which central banks would get together to sell dollars in exchange for euros and yen?   The last major effort of that sort was the Plaza 30 years ago.  (They also did it in a more minor way, to help the undervalued euro, in 2000.)

But 2015 is not 1985.   Neither the US authorities nor those in other G-7 countries will intervene in the foreign exchange market.  (They agreed not to, two years ago.)  Nor should they, in the current context.   In the first place, the appreciation is not yet anywhere near as big as it was 30 years ago (or even 15 years ago).  In the second place, today’s dollar appreciation is fully justified by economic fundamentals, unlike in 1985.

[The response to the NYT’s question from me and the others can be viewed at Room for Debate: “The Fed and the Dollar.”].
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For Academic Citation: Frankel, Jeffrey.Does the Dollar Need Another Plaza?.” Views on the Economy and the World, March 23, 2015,