Goldman Says New Plaza Accord ‘Unlikely.’ For Now

If you ask Goldman, a so-called “Plaza Accord 2.0” isn’t especially likely to come together.

Speculation about the prospect of an agreement, formal or otherwise, to weaken the dollar amid pervasive “breakage” across G10 FX, a record-low yuan and a generalized sense that additional tightening could push markets and economies over the ledge, is rampant.

The first signs of intervention came last month, first in the yen, then in gilts. The PBoC, meanwhile, leaned ever harder against additional yuan depreciation. What’s missing is the Fed. And Treasury. And cooperation more generally.

Goldman doesn’t think any grand bargain is in the offing. Or at least not imminently.

“A new Plaza Accord is unlikely for now,” analysts led by Kamakshya Trivedi said, noting that although “yen intervention and historic weakness in EUR and GBP have raised questions about the likelihood of coordinated intervention to weaken the dollar versus other G10 currencies,” the dollar’s rise, extreme as it is, is “consistent with the macro environment,” and a weaker dollar isn’t in the US’s interests.

“While the period leading up to the Plaza Accord does present an interesting parallel to current circumstances, the key difference between the current environment and the early-to-mid 1980’s was that it became in the US’s interests to weaken the dollar,” Kamakshya wrote. “While current dollar strength could be reversed, it’s not in US policymakers’ best interests just yet, given that a strong currency helps reduce imported inflation.”

The figure (above) is a useful annotated history of the period in and around the Plaza Accord. For Goldman, the current environment more closely resembles the prelude to the Plaza, if you will — the early 80s rather than the mid-80s.

Although the bank doesn’t expect a global accord to come together soon (i.e., probably not this month, when finance ministers and central bankers meet ahead of the November G20), Kamakshya did say that “if the dollar remains at very strong levels for a longer period of time, it becomes easier to envisage how these tensions might reemerge and interests may become more aligned.”

Kamakshya also noted that if Japan and the UK (for example) are interested in bolstering their currencies, they could pretty easily do so without US help.

“It would be relatively straightforward for the BoJ or BoE to change underlying policy in a more currency-supportive direction versus direct intervention in the FX market, if they were dissatisfied with current exchange rates,” Goldman said. “Direct intervention can only go so far when it is pushing against macro and policy fundamentals.”

I’ll be more direct: The BoJ could abandon yield-curve control (or at least widen the band) and Liz Truss could scrap her entire growth program, freeing up the BoE to commence QT and carry on with rate hikes that are determined, but not panicked. Again, those are my words, not Goldman’s.


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3 thoughts on “Goldman Says New Plaza Accord ‘Unlikely.’ For Now

  1. The problem is now rates are at a restrictive level. The FOMC may not think so, but the market is saying otherwise (yield curve, credit spreads, shipping prices, commodity prices, real estate prices, external value of the trade weighted $ you get the idea). So many are waiting for a pivot to reflect this reality. Japan and BOE and other central banks are being dragged along with bad choices to protect their currencies and deal with inflation. I am not saying the Fed was wrong to tighten policy- it is the speed and degree that are worrisome. The Fed has a few legs to stand on- employment is strong although that is a coincident/lagging indicator and consumer inflation as measured is still too high- although there is a measurement problem related to owners equivalent rent but to be fair service inflation is high without the rent. The final problem is that supply shocks are not susceptible to monetary policy fixes except for the very blunt instrument of killing consumption. Even if the FOMC did everything perfectly according to monetary policy hindsight we would still be looking at probably 6% CPI. All you have to do is to look around the world- even the early movers have excess inflation-wars and pandemics do those kinds of things. The next shoe to drop is going to be a pretty large disinflation- it will become evident very soon.

  2. “The next shoe to drop is going to be a pretty large disinflation”, which is exactly what the Fed wants!!! “Deflation is a decrease in general price levels, while disinflation is what happens when price inflation slows down temporarily.” Why would you object to disinflation?

  3. I, for one, I’m rooting for deflation — in food costs, housing costs, healthcare costs, education costs, and auto prices, for starters. All are too high and need to come down — not just slow their rate of increase.

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