The Plaza Accord of 1985: When Governments Moved the Dollar Together

[Fairman]

The Plaza Accord of 1985: When Governments Moved the Dollar Together

In September 1985, finance ministers and central bank governors of the five largest economies at the time met at the Plaza Hotel in New York and agreed to act to weaken the US dollar. The Plaza Accord is the best-known example of coordinated currency policy.

The dollar had risen sharply in the early 1980s, driven by high US interest rates and strong capital inflows. The strong dollar hurt American exporters and increased trade deficits, and pressure for protectionism grew. The participating governments announced they would intervene to bring the dollar down in an orderly way.

The dollar fell substantially over the following two years, against the yen and the German mark in particular. Part of the decline had begun before the meeting, and the announcement added momentum and credibility.

Later, in 1987, the Louvre Accord aimed to stabilize currencies after the decline had gone far.

The episode shows that coordinated action can influence currencies when it aligns with market forces and policy fundamentals. It also illustrates side effects: the strong yen contributed to economic adjustments in Japan that unfolded over the following years.

Coordinated interventions since then have been rare, which makes any talk of them notable. Statements by finance ministers about currencies can move markets.

Practical step: read how the dollar and yen moved from 1985 to 1987, and note how much occurred after the announcement.

[Fairman]

Interesting that a lot of the dollar decline had started before the meeting. Coordinated action works best when it pushes in the direction the market is already leaning. The dollar had peaked in early 1985, several months before the Plaza meeting in September, as US rates started coming down. The announcement then gave the move official support, and USDJPY fell from around 240 before the accord to roughly 150 by mid 1986, with the decline continuing into 1987. Intervention against a strong trend, by contrast, often fails or only works briefly. That's a useful thing to remember whenever a central bank talks about intervening today.

[Fairman]

Worth noting how rare this has been since. That's why even a hint of coordinated intervention in a G7 statement can move markets now. Real coordinated action since then has been occasional: the joint intervention to support the euro in September 2000 and the G7 action to weaken the yen after the 2011 earthquake in Japan are the main examples. Most intervention since has been unilateral, like Japan buying yen in 2022 and 2024. So when G7 statements change wording about excessive volatility or disorderly movements, traders pay attention, because the market knows how powerful coordinated action is when it actually happens, even if it rarely does.