Plaza Accord at 40: A Time Capsule of Macroeconomic Diplomacy

Forty years ago, finance ministers and central bankers from the United States, Japan, Germany, France, and the United Kingdom met at New York’s Plaza Hotel to tackle a problem that seemed insurmountable — an overvalued US dollar threatening trade, growth, and global stability. The solution, the Plaza Accord, was elegant in its simplicity. A coordinated currency intervention to engineer a managed depreciation of the dollar. Markets believed the US would act; Japan feared the consequences of defiance. Diplomacy and dominance aligned perfectly.

The economic backdrop of 1985 was stark. Reagan’s aggressive tax cuts and defence spending had ballooned the budget deficit to nearly 6% of GDP and pushed the current account deficit above $150 billion. The dollar had appreciated almost 50% since 1980, making American exports expensive and imports cheap. US manufacturers struggled, unemployment lingered, and trade tensions rose with major partners. Unilateral policy was clearly insufficient; coordinated action was the only path to stability.

The Plaza Accord did not impose legal obligations. It relied on market credibility and political alignment. By jointly selling dollars and buying foreign currencies, the G5 sent a powerful signal: the world’s largest economy would act, and others would follow, or pay a price. Japan’s compliance was decisive. Its export-led economy depended on access to the US market, and resistance risked trade barriers or political friction. Leaders later admitted that fear of angering Washington made acquiescence almost inevitable. The result? The dollar fell sharply against the yen over a period, easing US trade deficits and restoring competitiveness, though trade deficit worsened initially.

Fast forward to 2025, and the landscape has changed dramatically. The US is again running massive deficits, the dollar dominates global finance, and policymakers flirt with “inflating away” sovereign debt obligations. But the conditions that made 1985’s solution workable might have subtly changed. China has emerged as a global economic rival. Financial markets are faster, algorithm-driven, and hyper-liquid. Stablecoins and digital currencies complicate policy control, even if the current US administration thinks differently. Geopolitics is fractured. Attempting a Plaza-style devaluation today risks capital flight, interest spikes, and systemic instability. In any case, the US wants a strong dollar….at least it says so, even if its actions belie that. Probably a Plaza style solution to reduce trade deficit and to boost competitive domestic manufacturing may not be workable for the following reasons:

Structural obstacles are glaring. First, the dollar now underpins global debt, commodities, and cross-border finance; weakening it could destabilise markets worldwide. Second, one is not sure if major US allies would automatically comply without worrying about domestic political backlash. Nations are actively diversifying reserves, and China and the EU have less incentive to follow Washington’s lead. Third, domestic inflation sensitivity constrains large-scale interventions. Finally, political unpredictability - Trump-style threats, tariffs, and unilateral moves - undermines the trust that multilateral coordination demands.

The Plaza Accord’s enduring lesson is clear. Credibility and coordination matter more than raw power. In 1985, US hegemony, combined with political alignment among the G5, created an environment where markets and partners alike believed in coordinated action. Japan’s fear of US reprisal was central and without it, the Accord would have faltered. Forty years later, we are not too certain if dominance alone buys compliance. Multipolarity, high debt, digital finance, and fractured geopolitics mean that any attempt at a modern Plaza must be nuanced, deliberate, and credible.

The anniversary is a reminder that international macroeconomic cooperation is still possible, but it requires more than headlines, threats, or digital gimmicks. It requires trust, coordination, and a sober understanding of global interdependence. The US may no longer rely on fear and dominance to manage currency risks; it must rely on diplomacy, credibility, and carefully calibrated economic policy. The Plaza Accord worked once because the world had fewer moving parts. Today, the stakes are higher, the machinery faster, and the consequences of miscalculation far greater.

Forty years on, the question remains: Can the US still bend the dollar to its will, if it wants? History shows it is possible, but only if lessons from the Plaza, not illusions of dominance, guide the way.