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Memories from “the Plaza”

Hotel Plaza, New York. The main powers meet to stop the unstoppable appreciation of the dollar. Although it could well be a current headline, it happened in 1985, when the United States, France, West Germany, Japan and the United Kingdom agreed to a coordinated depreciation of the dollar. In those years we also faced galloping inflation, which would lead the United States Federal Reserve to raise official rates to levels close to 20%, while the dollar appreciated more than 55% against the currencies of its main partners. commercial.

Returning to our days, the unequivocal strength of the dollar has already caused the first actions: in Japan, the authorities have tried to stop the fall of the yen by intervening with sales of dollars, something that has not happened since 1998. In Europe, although the euro has reached 20-year lows, the ECB has, for the time being, not been so concerned. However, other major central banks such as Switzerland have already signaled their willingness to act. Currency tensions are on the rise, but undoubtedly the greatest are being felt in the UK, with the pound plummeting against the dollar to levels not seen since 1985.

Given these apparent similarities with the past, it is not surprising that representatives of the Biden Administration have been asked about a possible new coordinated intervention. Would an action of this magnitude really make sense?

Although the rumors are increasing with the arrival of the annual meetings of the IMF and the World Bank this week, we see it difficult for this to happen in the short term. The main reason is that, unlike in 1985, a strong dollar is now favorable to the United States, which seeks to curb inflation at all costs, and a stronger currency allows it to make its imports cheaper. For this reason, a coordinated action to weaken it would hardly be in line with US internal objectives.

On the other hand, the capacity for an intervention to be effective in a market as liquid and globalized as the currency market is now much smaller than in the 1980s. The daily trading volume exceeds 8.3 trillion dollars, 40 times higher than that of that period. In addition, in aggregate, the major world powers (G-10) have foreign currency reserves worth 2.8 trillion, a clearly limited amount compared to the total volume of this market. In this context, to avoid episodes of additional and unwanted depreciation of their currencies against the dollar, the other central banks of the developed economies will also have to continue raising their official rates, trying to gradually reduce the differential against those of the Fed. With a clearly deteriorating growth rate in the euro zone and in the United Kingdom, when it comes to raising interest rates, their central banks will be forced to choose between what is effective (accelerated increases) and what is desirable (gradual increases).

Source: EL PAIS

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