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May 18, 2022


SURGING DOLLAR STIRS MARKETS BUZZ OF A 1980S-STYLE PLAZA ACCORD

by Bloomberg News
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(Bloomberg) — The dollar’s skyrocketing rise has some contemplating a rare, if
not unthinkable, action: major nations agreeing to manipulate the US currency
until it falls.

It has happened before — most notably with 1985’s Plaza Accord — which took
place against a backdrop of soaring inflation, an aggressive Federal Reserve
rate-hike campaign and surging dollar. In other words, a scene that looks a lot
like today — a parallel that won’t be lost on Group-of-Seven finance ministers
and central bank governors as they meet this week.

Demand for the greenback has been relentless this year, the result of interest
rates rising quicker in the US than other developed economies and the war in
Ukraine prodding a stampede to the ultimate haven. The dollar’s 6.3% surge since
the start of the year has clobbered the yen to a two-decade low and put the euro
almost back to 1-to-1 parity with the US currency for the first time since 2002.
Investors are lasering on the yen tumbling to 150 per dollar and the euro
falling below 90 cents as a potential line in the sand.

For Stephen Miller, a four-decade market veteran and former head of fixed income
at BlackRock Inc. in Sydney, the situation now is reminiscent of his time as a
young buck in Australia’s Treasury Department, where he had a front-row seat
watching the Plaza Accord unfold.

Through that agreement which France, Japan, the UK, US and West Germany agreed
to weaken the dollar — a stance taken out of a belief that the dollar’s huge
move higher was damaging the global economy.

“One of the options down the track could be some sort of coordinated
intervention,” said Miller, now an investment consultant at GSFM, a unit of
Canada’s CI Financial Corp. which oversees about $289 billion in assets.
“Markets recognize that central banks are in a bind when they’ve only got the
interest-rate lever to push, so there’s already market chatter contemplating
these sorts of scenarios including a Plaza Accord-style move.”

QuickTake: The Strong Dollar

Of course, no one is predicting imminent intervention at this stage. US support
would be crucial to any effective agreement and that’s not likely in the near
term, given dollar strength is making imports cheaper — an attractive quality
during an era of high inflation.




 



Still, finance experts do see looming pain points for countries outside the US
that could amplify the drumbeat for coordinated intervention.

If the euro sinks below 0.90 — down from about 1.05 currently — against the
dollar, that could “start raising alarms,” according to Alan Ruskin, chief
international strategist at Deutsche Bank AG. GAMA Asset Management’s Rajeev De
Mello sees a yen collapse to 150 — a level last seen in the 1990s —  as the
potential trigger. A disorderly rise in the dollar might be a game-changer, said
Goldman Sachs Group Inc. strategist Zach Pandl.


PEER PRESSURE

There are certainly parallels to the US currency’s strength back in 1985 and
now: the Federal Reserve’s trade weighted dollar index has risen at an
annualized clip of 14% so far this year, quicker than the 12% pace seen in the
five years leading up to the accord.

US inflation is at the hottest level since the 1980s, when Fed Chair Paul
Volcker raised rates as high as 20%, and current head Jerome Powell has vowed to
do what it takes to curb rapid price growth.

“Certainly it’s something to consider especially if we see a crash in other
currencies,” said De Mello, global macro portfolio manager at GAMA in Geneva. A
“huge” divergence in monetary policy could induce such a decline, spurring the
Japanese to “say ‘our yen has fallen too much’ and other countries would also be
worried about the dollar.”

China’s rise in global markets is another factor. Beijing will likely need to
agree to any coordinated central bank action, but the yuan is not trading at
levels that would require such intervention right now, according to GAMA. But a
bona fide Plaza Accord II hangs on American involvement. The 1985 deal — whose
namesake is the notable Plaza Hotel in New York, where the conference was held —
was inked only after the second Reagan administration viewed foreign-exchange
intervention in a more favorable light, underscoring the difficulty of
coordinating any major agreement without American support.

“I have difficulty seeing the likelihood of concerted intervention at the
moment,” said Jane Foley, head of foreign-exchange strategy at Rabobank in
London. “Why would the Fed tighten financial conditions on one hand and then
loosen them with the other by intervening against the dollar?”

It’s a sentiment shared by Colin Graham, head of multi asset strategies at
Robeco Groep.

“The stronger dollar tightens monetary conditions and this will be helping” the
Fed’s policy, said Graham. “The hurdle for coordinated action is still very
high.”







Treasury Secretary Janet Yellen said Wednesday that it’s understandable the
dollar has appreciated amid rising US interest rates, and that these gains have
posed a concern for some other countries.

“We’re committed to a market-determined exchange rate,” Yellen said at a press
briefing in Bonn, Germany on Wednesday. “It’s understandable that the dollar has
risen” as rising US interest rates spur capital flows into the greenback, she
said.


RECESSION BETS

This reticence could however change if the US economy contracts and a
persistently strong greenback hobbles everything from employment to trade. The
probability of a recession within the next year is at 30%, the highest since
2020, according to a survey of economists by Bloomberg.

While most major currencies are far from crisis levels that would necessitate
another Plaza Accord, it cannot be completely ruled out, said Jack McIntyre of
Philadelphia-based Brandywine Global Investment Management.

“Could it happen? Yes, perhaps, especially if the US enters a recession and a
stronger dollar hurts the labor market,” he said. “It’s not imminent. I see the
dollar weakening at some stage — but you never say never.”

STOCKS REBOUND AHEAD OF BIG TECH EARNINGS WEEK: MARKETS WRAP

U.S. stocks rose as dip-buyers emerged ahead of a busy week for Big Tech
earnings

Apr 25, 2022

In "Sectors"

U.S. STOCK FUTURES WAVER, TREASURY YIELDS CLIMB: MARKETS WRAP

U.S. index futures struggled for traction and stocks in Europe declined as
investors weighed the prospect of aggressive policy action to curb inflation.
Treasuries slid and the dollar strengthened.

Apr 19, 2022

In "Sectors"

CURRENCIES ROILED AS RUSSIA SANCTIONS RIPPLE IN GLOBAL MARKETS

Emerging-market currencies slumped and Australian bonds soared as global markets
opened in Asia Monday, in some of the first signs of the growing financial
fallout from Russia’s assault on Ukraine and the West’s response via sanctions.

Feb 27, 2022

In "News"

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