By 1985 the US dollar had appreciated 50% against major currencies since 1980, driven by Volcker’s tight monetary policy and the Reagan administration’s fiscal expansion. The overvalued dollar was devastating US manufacturing — American exports were priced out of global markets while imports flooded in. The trade deficit hit a record. Congressional protectionist pressure was building.
On September 22, 1985, the finance ministers and central bank governors of the G5 (US, UK, France, West Germany, Japan) met secretly at New York’s Plaza Hotel. They agreed to coordinate intervention to weaken the dollar. The announcement triggered the largest currency move in history: the dollar fell 50% against the yen and deutschmark over the following two years.
The unintended consequence was catastrophic for Japan. To offset the impact of yen strength on exports, the Bank of Japan cut interest rates dramatically. Ultra-cheap money flowed into Japanese stocks and property, creating the bubble that peaked at 38,916 on the Nikkei in December 1989 and collapsed in 1990 — triggering the three lost decades.
The prevailing view before the reckoning
The strong dollar was a permanent feature of Reagan-era prosperity. Currency markets were self-correcting and intervention was futile. The US trade deficit reflected structural competitiveness issues that a weaker dollar could not fix. G5 coordination was impossible given conflicting national interests.
Coordinated intervention can work
The Plaza Accord proved that G5 central bank coordination could move major currency pairs. This remains the reference point for any discussion of coordinated dollar intervention — including current de-dollarization debates.
Policy solutions create new problems
The Plaza fixed the dollar overvaluation. Japan’s monetary response to Plaza created its 1990 bubble. The Louvre Accord of 1987 tried to stop the dollar from falling too far. Every solution generates the next crisis.
Exchange rate policy has distributional consequences
Dollar strength helped US consumers and hurt US manufacturers. Dollar weakness reversed these. Trade policy, currency policy, and monetary policy are all the same policy from different angles.
The 1985 template is referenced in every trade war
Every time a trade imbalance becomes politically unsustainable — US-China today, US-Japan in 1985 — the Plaza Accord is the reference point. Can the US force a Plaza 2.0 on China?