The Plaza Accord of 1985: When Governments Pushed the Dollar Down

The Plaza Accord was an agreement signed on 22 September 1985 by the finance ministers and central bank governors of the United States, Japan, West Germany, France and the United Kingdom to push the US dollar lower against the other major currencies. It is the most famous example of governments working together to move exchange rates.

Over the next two to three years the dollar lost about half its value against the yen and the German mark, and the deal is still discussed whenever politicians complain that the dollar is too strong.

For traders, the Plaza story shows two things at once: coordinated policy can move even the deepest currency market, and the consequences of a big move can play out for years in ways nobody planned.

Why the dollar had become too strong

In the early 1980s the Federal Reserve, led by Paul Volcker, raised interest rates to record levels to crush inflation. High US yields drew money from around the world, and the dollar soared. The Fed's own trade-weighted index of the dollar rose from 93 in September 1980 to 144 at its peak in February 1985, a gain of more than 50%.

A strong dollar made American goods expensive abroad and imports cheap at home. US manufacturers lost market share, the trade deficit widened, and Congress began talking about tariffs and quotas, especially against Japan. Treasury Secretary James Baker wanted to bring the dollar down before trade protection took hold, and he needed the other big economies to help.

What was agreed at the Plaza Hotel

Baker invited his G5 counterparts to the Plaza Hotel on a Sunday, when markets were closed. Their statement said that an "orderly appreciation" of the other main currencies against the dollar was desirable, and that they stood ready to cooperate more closely to encourage it. The governments would sell dollars, and they wanted the market to know it.

The deal also contained policy promises. Japan and Germany agreed to boost domestic demand, and the US agreed to reduce its budget deficit. Those parts were harder to deliver than the currency intervention, which central banks could carry out in the market directly.

How far the dollar fell

The reaction was immediate. On the first trading day after the announcement the dollar dropped sharply, and the decline continued for more than two years. The yen, which had traded around 240 to the dollar in 1985, strengthened to about 150 by late 1986 and to the 120s by 1988.

Part of the fall would probably have happened anyway, because the dollar had already started to slip from its February peak. But the accord gave the move a clear direction and official backing, and traders were happy to ride a trend that governments had promised to support. By early 1987 the same governments feared the dollar had fallen far enough, and they signed the Louvre Accord in Paris to try to steady it.

The consequences nobody planned

The strong yen hit Japan's exporters hard. To support growth, the Bank of Japan cut interest rates and kept them low, and cheap money flowed into property and shares. The Nikkei and Tokyo land prices soared to extraordinary heights before the bubble burst at the start of the 1990s, leading to what became known as Japan's lost decade. Economists still debate how much of that bubble the Plaza Accord caused, but most agree the low rates that followed it played a part.

The US trade deficit did not shrink as fast as hoped either. A cheaper dollar takes time to change what people buy, and Japanese firms responded by cutting costs and moving production abroad rather than simply raising prices. The episode became a lesson in how hard it is to fix trade imbalances through exchange rates alone.

Could there be a Plaza Accord today?

Talk of a "Mar-a-Lago Accord" or "Plaza 2.0" comes up whenever US officials want a weaker dollar. A repeat is harder now. The forex market is many times larger, with the BIS putting daily turnover at $9.6 trillion in 2025, so central bank sales are a smaller share of trading. China, now a major economy, was not part of the 1985 group. And many central banks are reluctant to act for another country's trade goals. Coordinated intervention still happens, as in 2011 when the G7 sold yen after Japan's earthquake, but only rarely and usually to calm extreme moves.

Lessons for traders

• Do not fight a coordinated policy. When major governments publicly agree on a direction and act on it, the trend can last a long time.
• Weekend meetings mean Monday gaps. The Plaza deal, like many policy shocks, was announced while markets were shut.
• Big currency moves have slow side effects. Interest rates, asset prices and trade adjust over years, and those adjustments create new trends.
• Watch official language. Phrases such as "excessive volatility" or "orderly appreciation" in central bank statements can signal intervention.

Frequently asked

Related reading

• The history of forex
• The Nixon Shock of 1971
• The major currency pairs
• FOMC guide for forex traders