Plaza memories may unnerve Trump-fueled dollar bulls

Wed Nov 30, 2016 7:25am EST
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By Jamie McGeever

LONDON (Reuters) - Parallels between Donald Trump's U.S. economic plan and early 1980s Reaganomics have supercharged the dollar, reminding some that its rampant gains 30 years ago eventually required intervention to reverse them.

The greenback's surge under then-president Ronald Reagan was so powerful that by 1985 it required a rare international accord between the world's five leading economic powers and their central banks to weaken the currency - the so-called Plaza Accord, named after the New York hotel where the deal was inked.

Trump - who purely coincidently owned the Plaza for a while after the accord - has pledged a $1 trillion fiscal package of tax cuts and infrastructure spending over 10 years. This follows a path set by Reagan in the early 1980s and markets are taking their cue.

The rise in U.S. bond yields and expected path for interest rates based on growth prospects has boosted the dollar's five-year rally, lifting the currency to a 14-year high.

Most observers expect it to appreciate next year as the U.S. economy outperforms and the Federal Reserve raises rates while other major economies and central banks lag behind.

But the dollar can only rise so much without harming U.S. manufacturing, a sector Trump has promised to support. Memories linger of the three million manufacturing jobs lost in the early 1980s under Reagan before the historic agreement in 1985 between the Group of Five leading economies to bring the dollar down.

Nigel Lawson, British finance minister in 1985 and a signatory of the Plaza Accord, notes that the drive to weaken the dollar then was led by Washington.

"The Plaza agreement was a U.S. initiative," Lawson told Reuters in an email. "In present circumstances, that seems unlikely to occur."   Continued...

A general view of the Plaza Hotel in New York, New York, U.S. August 18, 2014.  REUTERS/Carlo Allegri/File Photo