By Mike Dolan
LONDON (Reuters) – There is a persistent murmur in financial markets that the Trump administration may push through a grand bargain to weaken the overvalued U.S. dollar. But there are multiple problems here, not least Europe’s likely unwillingness to play ball.
For any repeat of the dramatic 1985 “Plaza Accord” between the U.S. and its main allies to weaken a then-stratospheric dollar exchange rate and ease America’s widening deficits, the clue is probably in the name: “Accord”.
Even though Washington could again conceivably offer such a deal in return for shelving threatened import tariffs, there’s considerable doubt that coordinated dollar sales would make any sense beyond sowing financial volatility.
And there’s even more of a doubt that euro zone nations would be either willing or able to take part.
The European Central Bank underlined again on Thursday that it’s still in firmly credit easing mode, as the euro zone economy struggles amid multiple internal and external uncertainties.
And it’s this contrast with a far hotter U.S. economy and a tighter Federal Reserve that explains much of the dollar’s prevailing strength – along with many years of overwhelming westward-bound transatlantic investment flows to outperforming U.S. equity and debt.
Further ECB easing is likely through this year and a weaker euro – itself not far from record highs on a broader trade-weighted basis – would be seen as an integral part of any recovery and rebalancing plan there. Agreeing to sink the dollar against that backdrop may seem perverse in Frankfurt.
The same argument could be made of China – even though there’s at least a direct line of negotiation with Beijing on the issue.
But even if “realpolitik” between U.S. President Donald Trump’s new administration and other governments in North America or Asia did see a meeting of minds, it’s not at all clear how that would work in Europe.
While European Union treaties nod vaguely to euro finance ministers’ collective role in the broad “orientation” of exchange rate policy, it’s still not obvious how that would work during a bout of global intervention, and the multi-national ECB has typically had the whip hand on such matters over the years.
And as the ECB is bound by domestic inflation and financial stability mandates, it’s doubtful it could engage in political horse-trading on its own. It’s also still unclear how it would take instruction from the euro zone group on such a matter – or even how the latter could formulate and demand that participation.
The euro has sometimes been dubbed “a currency beyond the state” when discussing its internal workings – but that could also be said of how it may frustrate its use as a political bargaining chip.
A move justified by the priorities of global financial stability could possibly give the ECB some cover – but a quid pro quo borne of political pressure from Washington or even Brussels seems trickier. It would at least prompt questions about the ECB’s role as guardian of the single currency.
‘PLAZA2’ PIPE DREAM?
And yet there continues to be discussion of such a global deal in the wings – partly as investors view the 35% appreciation of the dollar’s “real” trade-weighted value over the past decade as close to its 40% surge in the five years leading to the Plaza foray under then-U.S. President Ronald Reagan.
Currency fund manager Stephen Jen this week was the latest to playfully make a case for a “Mar-a-Lago Accord” on the 40th anniversary of Plaza this September.
Jen’s main points were that China may not be as averse to a tariff intervention deal as many assume and relative cyclical weakness in China and Europe may be different later this year.
Trump’s first week and a half in office has been predictably laced with warnings about yawning U.S. trade gaps, unfair practices and currency manipulation that may be met with tariff rises and other measures. So far, he’s sidestepped comments from advisers last year about moves to devalue the dollar per se and his own hand-wringing about the dollar’s overvaluation during the 2024 presidential campaign.
One executive order on “America First Trade Policy” tasks new Treasury Secretary Scott Bessent with proposing “appropriate measures to counter currency manipulation or misalignment that prevents effective balance of payments adjustments.”
Commerce and trade officials would monitor the extent of this issue and design the response, it said, hardening existing frameworks.
The Trump team’s main problem with tariff threats, however, is that markets see them as a reason to buy rather than sell dollars.
That’s due to the economic damage they may wreak on the economies and currencies of those affected as well as the assumption they may be inflationary and keep U.S. interest rates high.
And with that comes a bundle of other contradictions in the mooted policy stance – not least Bessent’s parallel insistence on sustaining the dollar’s dominant global role.
Mark Sobel, a former U.S. Treasury official who is now the U.S. chairman of financial think tank OMFIF, this week wrote of the Trump team’s repeated “confusion” on currency issues.
“First and foremost, American deficits are made in America. Foreigners can’t fix that,” Sobel wrote, questioning both U.S. tax and tariff plans and misguided attempts to scientifically measure equilibrium exchange rates.
“Currencies are impacted by capital flows, swamping current account flows,” he added, suggesting dollar overvaluation would only dissipate when the blinding investment bias toward exceptional U.S. economic and corporate performance reverses.
In the meantime, don’t hold your breath for a grand currency bargain involving the other side of the world’s pivotal euro/dollar exchange rate.
The opinions expressed here are those of the author, a columnist for Reuters.
(By Mike Dolan; Editing by Paul Simao)
Comments