During the early 1980s, the value of the US dollar rose significantly against those of its major trading partners. The Ronald Reagan government was looking to reduce the rate of inflation, which led the US Federal Reserve to increase US interest rates sharply. As a result, more people bought dollars to take advantage of the higher interest rates on offer, pushing up its value.
This created problems for US businesses the high dollar made their goods more expensive on world markets, while making imports cheaper in America. Some companies began lobbying politicians to shield them from foreign rivals.
To avoid a trade war, the US, Japan, West Germany, France and the UK signed an agreement at the Plaza Hotel in New York in 1985 the Plaza Accord. They agreed to intervene in the currency markets to drive down the value of the dollar, by selling dollars. It worked the dollar fell in value by 50% over the next two years.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Unfortunately for Japan, the falling dollar and rising yen hammered its exports. To boost its economy, Japan cut interest rates, which led to a credit boom and a price bubble in the Japanese stock and property markets. The bubble burst in 1990, and the Japanese economy has not yet recovered.
-
8 of the best houses for sale for around £500,000Some of the best houses for sale for around £500,000 – from a 19th-century stone farm cottage in North Yorkshire and a two-bedroom apartment in Edinburgh’s New Town to a converted Methodist chapel in Norfolk
-
What will the unravelling of US-China trade mean for the economy?What will a US-China decoupling mean for the global economy?
-
Margin callGlossary When an investor borrows to bet on markets, they put down a deposit known as “margin”.
-
Bernanke put
Glossary There is a widespread belief that the US central bank can always rescue the economy by decreasing interest rates. Since the current chairman is Ben Bernanke this is known as the 'Bernanke Put'
-
Bond vigilantes
Glossary "If the fiscal and monetary authorities won't regulate the economy, the bond vigilantes will," says economist Ed Yardeni on Bloomberg...
-
Greenspan put
Glossary A 'put' is a type of option contract that increases in value as the price of the underlying asset falls.