Plaza Accord

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.

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.