The Plaza Accord of 1985 US Dollar Index® FuturesICEUS_DLY:DX1!SkinwahThe Plaza Accord of 1985 was a coordinated effort by the G5 nations (U.S., Japan, West Germany, France, and the UK) to address the U.S. dollar's extreme strength, which had reached an all-time high of 164.720 on the U.S. Dollar Index (DXY) in February 1985. The dollar's overvaluation—up nearly 50% against major currencies since 1980—hurt U.S. exports, widened trade deficits (especially with Japan), and raised fears of protectionism. Here's what the G5 did to weaken the dollar: Agreement to Intervene in Currency Markets: On September 22, 1985, finance ministers and central bank governors of the G5 met at the Plaza Hotel in New York and agreed to a joint intervention strategy. They committed to selling dollars and buying other currencies, primarily the Japanese yen and German Deutsche Mark, to drive down the dollar's value. The U.S. Federal Reserve, Bank of Japan, Bundesbank, and other central banks executed these interventions in the foreign exchange markets. Over the following months, they sold an estimated $10 billion worth of dollars, a significant amount at the time. Policy Commitments to Support the Intervention: The U.S. agreed to reduce its fiscal deficit and lower interest rates, which had been high (around 8–10% for the federal funds rate) due to the Volcker-era tight monetary policy. High rates had attracted foreign capital, strengthening the dollar. By signaling a shift toward looser policy, the U.S. aimed to reduce this capital inflow. Japan and West Germany committed to stimulating their economies through measures like lowering interest rates and increasing domestic demand. This made their currencies more attractive relative to the dollar, supporting the depreciation effort. Market Signaling and Expectations: The public announcement of the Plaza Accord sent a strong signal to markets that the G5 were unified in their goal to weaken the dollar. This shifted market expectations, encouraging speculators and investors to sell dollars, which amplified the intervention’s impact. The accord also included a target to reduce the dollar’s value by 10–12% against the yen and Deutsche Mark, giving markets a clear benchmark. Outcome: The dollar began to decline immediately after the accord. By the end of 1985, the DXY had fallen to around 140, and by 1987, it dropped to 90—a 45% decline from its peak. The yen appreciated significantly, rising from 240 yen per dollar in 1985 to 150 yen per dollar by 1987. The Deutsche Mark also strengthened, moving from 3.2 to 1.8 marks per dollar over the same period. The intervention succeeded in reducing the U.S. trade deficit with Japan and Europe in the short term, but it also led to challenges, such as Japan’s economic overheating (contributing to its asset bubble in the late 1980s) and the need for further coordination via the 1987 Louvre Accord to stabilize the dollar after it fell too far. The Plaza Accord remains a landmark example of coordinated international policy to manage currency imbalances, driven by direct market intervention, policy adjustments, and clear signaling to shift market dynamics.