Trump's dollar plan: Brace for exorbitant disruption

A Plaza Accord redux to weaken the US currency is part of an approach that's too deeply flawed to work

- NARAYAN RAMACHANDRAN

In the face of it, the chaotic action and frenetic pace of US President Donald Trump's first 50 days in office lack cohesive thought and direction. Dig deeper and a picture emerges of a potential 'framework' or 'grand design'.

Believers see two main reasons for a reset of the global trade order. The first is a deep-seated resentment that the United States has been subject to foreign subsidies, unfair trade practices and dumping of goods, and the second is a belief that the US has disproportionately shouldered the cost of the post-World War II security architecture for the rest of the world, particularly Europe and Japan. Consequently, the US has been running large trade deficits and its dollar has steadily strengthened in a trade-weighted sense for decades.

One representation of the trade-weighted dollar (TWD) is an index put out by the St. Louis Fed that shows the Nominal Broad US dollar index rising 50% since its recent lows in 2008. The previous high for the TWD index was in 1985. That high point resulted in a major multilateral agreement to weaken the dollar called the Plaza Accord.

This Accord was an arrangement between the US and four other countries—Japan, UK, Germany and France—to take coordinated action to bring down the value of the dollar, which was estimated to be about 25% overvalued at that time. The accord worked well for the US, completely reversing the upswing of the dollar within two years.