The Trade Facilitation and Trade Enforcement Act
This chart shows the JP Morgan dollar index, which adjusts for trade flows and inflation. Note that the dollar rose by nearly 50% from 1978 to 1985. The combination of deregulation, loose fiscal policy and tight monetary policy made the dollar very attractive to foreign buyers as it led to falling inflation and very high real interest rates.
For much of the past decade, Crispin Odey has been waiting for inflation to rear its ugly head. The fund manager has been positioned to take advantage of rising prices in his flagship hedge fund, the Odey European Fund, and has been trying to warn his investors about the risks of inflation through his annual Read More
However, the strong dollar undermined U.S. competitiveness, taking the current account from near-balance in 1981 to a 3.3% deficit (as a percentage of GDP) by 1987. In 1985, at the Plaza Hotel in New York, the G-5 (U.S., U.K., Germany, Japan and France) agreed that the dollar’s strength had become a danger to the global economic system and all agreed to push the dollar lower through direct intervention and “jawboning.” These measures, even in the absence of other policy changes, were effective in lowering the dollar. In 1987, the same group agreed to arrest the dollar’s decline by creating a set of “reference rates.”
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