Plaza Accord
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The Plaza Accord or Plaza Agreement was an agreement between the governments of France, West Germany, Japan, the United States and the United Kingdom, agreeing to depreciate the US dollar in relation to the Japanese yen and German Deutsche Mark by intervening in currency markets. The five governments signed the accord on September 22, 1985 at the Plaza Hotel in New York City.
The exchange rate value of the dollar versus the yen declined by 51% from 1985 to 1987. Most of this devaluation was due to the $10 billion spent by the participating central banks.[citation needed] Currency speculation caused the dollar to continue its fall after the end of coordinated interventions. Unlike some similar financial crises of the 1990s, such as the Mexican and the Argentine financial crises of 1994 and 2001 respectively, this devaluation was planned, done in an orderly, pre-announcement manner and did not lead to financial panic in the world markets.
The reason for the dollar's devaluation was twofold: to reduce the US current account deficit, which had reached 3.5% of the GDP, and to help the US economy to emerge from a serious recession that began in the early 1980s. The U.S. Federal Reserve System under Paul Volcker had overvalued the dollar enough to make industry in the US (particularly the automobile industry) less competitive in the global market. Devaluing the dollar made US exports cheaper to its trading partners, which in turn meant that other countries bought more American-made goods and services. The Plaza Accord was successful in reducing the US trade deficit with Western European nations but largely failed to fulfill its primary objective of alleviating the trade deficit with Japan because this deficit was due to structural rather than monetary conditions. US manufactured goods became more competitive in the exports market but were still largely unable to succeed in the Japanese domestic market due to Japan's structural restrictions on imports.[clarification needed] The recessionary effects of the strengthened yen in Japan's export-dependent economy created an incentive for the expansionary monetary policies that led to the Japanese asset price bubble of the late 1980s. The Louvre Accord was signed in 1987 to halt the continuing decline of the US Dollar.
The signing of the Plaza Accord was significant in that it reflected Japan's emergence as a real player in managing the international monetary system.
[edit] See also
[edit] References
- ^ "Fed of St. Louis HP". http://www.research.stlouisfed.org/. Retrieved on 2009-05-04.
[edit] External links
- Announcement the Ministers of Finance and Central Bank Governors of France, Germany, Japan, the United Kingdom, and the United States (Plaza Accord)
- U.S. Treasury - Exchange Stabilization Fund, Intervention Operations 1985-90
- Plaza Agreement, ANZ Financial Dictionary from Language of Money by Edna Carew
