No chance these days of a "Gentleman's Agreement" to curb Dollar strength.....

Tuesday 15th September 2015

No chance these days of a "Gentleman's Agreement" to curb Dollar strength.....

Ref : "The U.S. Dollar Is Gaining Like It's the 1980's  --  For Better or Worse " , Bloomberg Markets Online

It may be a little off its highs but the Dollar is in its strongest bull run since 1984 and within 8% of its record high on a trade-weighted basis. Over the last two years it has gained 20% against the Japanese Yen and 17% against the Euro, and for wholly understandable reasons. Over the period, the US economy has gathered momentum whilst Japan and the Eurozone have struggled to kick-start upward growth, to the extent that the US Federal Reserve is contemplating a rate rise just as Japan and Europe consider further monetary easing. All other things being equal (no capital controls, credit ratings, geopolitical concerns etc) , interest rate differentials will always be the biggest driver of capital flows and exchange rates.... no surprise then to see such a strong US currency.

No surprise perhaps but no less unwelcome for the Fed as it makes its decision on rates this week ..... one that will be announced on Thursday. Make no mistake, the strength of the Dollar will be a factor in Fed thinking .....  currency strength of this order stifles much-desired inflationary pressures, damages exporters and creates destabilising trade imbalances. If growth and unemployment levels were all the Fed had to worry about, the case for an immediate rise would be much stronger.

It's a dilemma all right, and some members of the Fed might be wishing that they had the same tools at their disposal as were available to their predecessors thirty years ago. At that time the dollar had been rising for six consecutive years and had strangled the competitiveness out of US companies. In September 1985 the US called a meeting with the finance ministers of Japan, Germany, France and the UK at the Plaza Hotel in New York and forged an agreement  to weaken the US$ through co-ordinated action. Within two years the dollar had fallen 50% against the Jap Yen and 30% against the Deutschemark.

It couldn't happen now ..... for one thing, there is no equivalent forum for the big cheeses to put together such a scheme. Rather touchingly, veterans talk of the human relationships built up over years that were crucial in establishing the trust to allow the Plaza Accord, as it is known, to succeed. Touching or not, it compares very favourably to its equivalents of the modern era .... the recent G20 meeting was unable to come up with any response to China's slowdown, the Yuan devaluation and the threat of currency wars. It is probably too unwieldy to do so and less likely to reach a consensus.

The G7 would seem a more appropriate vehicle but the days of large scale, concerted and co-ordinated intervention plans are surely over. It can still effect short-term results  --  soothing disorderly markets, for example  --  but there is no appetite taking on markets in a more fundamental fashion. Besides, the world and the markets have just got too big : In 1985 that group of five accounted for more than 50% of the world's GDP. Now, the world's GDP is  $113trn of which the expanded G7 is responsible for about 30%.

No new Plaza Accord for the Fed, then ..... and no easy way out of their currency dilemma.