In our work, we have argued that the dollar is having its third significant rally since the end of Bretton Woods. The first rally was associated with Reagan though it began under Carter and followed 100 bp hike by a new Federal Reserve Chairman (Volcker).
On a real broad trade-weighted basis, the dollar appreciated by more than 50% over the seven years and in 1985, the G7 met at the Plaza Hotel in NY and agreed tocoordinate intervention to drive the dollar down.
Before last month’s G20 meeting, some had talked about the possibility of another Plaza-like agreement. We downplayed such suggestions. There was no appetite for intervention. Many countries are still easing monetary policy, and typically central banks want their currencies to move in the same direction as monetary policy. Otherwise, the foreign exchange market would dilute the impact of the easier policy.
We also argued that ideologically, the US and Europe could not press China (and others) to allow market mechanisms to drive foreign exchange prices, and then intervene when they did like what the markets had done. With the notable exception of the intervention after the Japan’s tsunami and nuclear accident, there was not G7 intervention in the foreign exchange market in recent years. Even during the 2008-20090 Global Financial Crisis (GFC), the G7 did not intervene. Swap lines between central banks provided access to the needed dollar funding.
In addition, the dollar’s strength is generally understood to be part of the solution, not the problem. The US responded relatively early and aggressively to the GFC.It asset purchases began in 2009.The ECB and BOJ begin their programs several years later, for example.A weaker euro and weaker yen are part of the solution not part of the problem.
Nevertheless, some observers are arguing that there was a secret G20 agreement to stop the dollar from rising. Leave aside the fact that euro made is low a year ago (16 March 2015) near $1.0460. Leave aside the fact that the dollar fell almost 9% against the yen in the two weeks prior to the G20 meeting.Leave aside the fact that G20 officials have repeatedly denied such conspiracy theories.
