- Officials of the Trump administration have said they want a weak dollar.
- The US government pushing for a weak greenback breaks with recent tradition.
- But 35 years ago, the Reagan administration worked with foreign governments to weaken the dollar.
At the beginning of the year, Treasury Secretary Steve Mnuchin said a weaker dollar “is good for us as it relates to trade and opportunities.” The comment broke with the tradition of American officials publicly backing a strong dollar, and prompted President Donald Trump to say Mnuchin was taken out of context.
But thirty-five years ago, the US government began taking part in coordinated efforts with allies to weaken the rallying dollar. Here’s a brief look back at what happened.
Why did the dollar strengthen back then?
It all started in 1980, when the US inflation rate was in the double digits.
In an iconic move that set a new precedent for central-bank policies in the US, the Federal Reserve under Chairman Paul Volcker doubled the federal funds rate to a historic high of 20%. At the same time, President Ronald Reagan began pursuing a sweeping economic expansion through dramatic tax cuts and deregulation.
That combination pushed up long-term interest rates, shored up capital and appreciated the currency. Double-digit inflation began to edge lower, falling to under 4% within three years. And the dollar more than doubled in value versus a basket of currencies – the Japanese yen, Deutsche mark, French franc and British pound – between 1978 and 1983.
Why might a strong dollar face criticism?
A strong dollar makes American products more expensive for overseas customers, so it can weigh on domestic exports. Throughout the 1980s, the current account deficit widened to as much of 3.5% of gross domestic product, a historic peak for the time.
Though major trading partners may have seen a boost in some exports, the strong dollar was not received warmly abroad. Other countries complained American interest rates forced them to raise borrowing rates in to keep their currencies competitive, which threatened to slow down growth during a time of global economic recovery.
What did the US government do about it?
Aided by European countries and Japan, the Reagan administration in July 1983 began to intervene in foreign exchange markets. Those countries coordinated efforts to sell dollars and buy up other currencies.
While this wasn’t unprecedented, it was the first time the Reagan White House had intervened over an extended period of time. Administration officials said they believed currency rates should be guided by a free market, but at the same time saw an intervention as justifiable when the environment was ”disorderly.”
Efforts to rein in the dollar culminated in September 1985 when the United Stated, West Germany, Japan, Switzerland, the United Kingdom and France signed the Plaza Accord. The agreement marked formal efforts to depreciate the dollar, specifically relative to the yen and the mark.
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