ALEX BRUMMER: 1985 dollar action contrasts with current malaise
ALEX BRUMMER: Actions taken in 1985 by powerful financial leaders contrast with the lack of public response to the current disruptive trajectory of the dollar
On a mild Sunday in September 1985, while working as a correspondent in Washington, I received a phone call from a colleague at the FT who suggested that it might be worth going to New York. Financial leaders from the five major advanced economies were holding an unscheduled meeting.
We headed to the Plaza Hotel in Manhattan. Upon arrival we asked where the meeting was taking place and were directed to an upstairs suite.
There we were confronted by Paul Volcker – then Chairman of the Federal Reserve – and out of the corner of my eye I saw British Chancellor Nigel Lawson.
Snapshot: This year alone, the pound has fallen 11% against the dollar
We realized we had accidentally hit what would later become a milestone in global financial history and left the room. We joined other reporters waiting in the basement of the Oyster bar before being called in for an impromptu late night briefing. The Plaza meeting was called by US Treasury Secretary James Baker and his deputy Richard Darman after a series of secret and informal meetings in Japan and Europe.
A surge in the dollar created serious imbalances for the global economy and it was agreed that after a period of free floating of global currencies – without central bank actions – policy had to change.
The decisive actions taken 37 years ago, by strong and committed financial leaders, contrast with the lack of public reaction to the current disruptive trajectory of the dollar. This year alone, the pound has fallen 11%, the euro 11% and the Japanese yen has fallen 15%.
At the Plaza, Japan pledged to reform taxation to stimulate domestic investment and Germany, after some persuasion, agreed to be called a “surplus” country.
The five nations – the United States, Germany, Japan, France and the United Kingdom – have agreed to launch a joint plan to drive down the value of the dollar through coordinated intervention.
Plaza was critical on two counts. This marked a new period of economic coordination by the great economic powers of the time. And it demonstrated a willingness, in an era of floating exchange rates, for central banks to act.
More recently, similar coordinated action was seen during the unfolding of the Great Financial Crisis in the fall of 2008. And at the onset of the pandemic in March 2020, when there was joint action to cut interest rates and increase the scale of bond purchases. . New currency swap arrangements have been put in place to counter the global disruptions.
Anyone following the market narrative in recent weeks might think that this year’s fall in sterling was a one-off British event dictated by Brexit, Boris Johnson’s self-immolation and Britain’s sub-optimal balance of payments .
This does not explain why the yen is at its lowest level for a quarter of a century and the euro at near parity with the dollar.
European and Japanese central banks have been slow to raise interest rates, widening a gap with the yields of safe-haven US Treasuries and their foreign counterparts. Bank of England chief economist Huw Pill also noted that US energy self-sufficiency is a dividing line.
Large currency and rate divergences between G7 economies are driving trade imbalances, sharpening protectionist instincts and delaying recovery from the pandemic. That’s why another place is needed.
With Joe Biden’s moribund administration, it’s a whole other story.