From 1985 Plaza Accord to 2017 'Trump Tower Accord'?

♠ Posted by Emmanuel in , at 11/30/2016 05:29:00 PM
Like Macaulay Culkin, foreign exchange markets circa 2017 may need some direction from Trump.
Too strong a US dollar is not usually good for the rest of the world economy, but that's what we have at the moment with widespread expectations that the United States will hike interest rates faster with a "President Trump." As growth is expected to ramp up through pump priming, the dollar has strengthened accordingly. A casualty since the November 8 election result has been emerging markets--currencies, bonds, stocks...you name it. Not only do they have to deal with an increasingly more attractive US market, but there's also Trump's threat of protectionist measures against developing countries. It has not been a pretty picture in the emerging markets.

However, neither the incoming US leadership nor the developing countries currently being roiled by the strong dollar may necessarily be pleased by this state of affairs. US exports would become less competitive abroad with a strong currency. Meanwhile, the likes of China, Mexico and so on would become easier target for unfairly "manipulating" their exchange rates from the perspective of a President Trump when, in reality, it is the rampaging dollar that is more behind the current moves.

What to do? In 1985, the United States famously gathered economic bigwigs of other major American trade partners at the famous Plaza Hotel in New York to agree to coordinated interventions leading to a weaker US dollar and stronger yen, deutsche marks, francs, etc. Between then and now, Donald Trump briefly owned the Plaza--hence his cameo appearance giving directions to Macaulay Culkin in Home Alone 2: Lost in New York set in--where else--the New York Plaza.

Trump may no longer own the Plaza, but the idea of gathering foreign economic leaders to weaken the dollar once more makes sense according to Hongkongers Andrew Sheng and Xiao Geng:
The strengthening dollar and weakening yuan are shaping up as powerful crosscurrents for global growth. Their divergence could amplify tensions between the U.S. and China over a persistent trade deficit that President-elect Donald Trump has promised to shrink through tariffs and by labeling China a currency manipulator, risking a trade war between the world’s biggest economies. It’s a scenario both sides are keen to avoid.

China doesn’t want excessive yuan weakness because it would prompt companies and savers to shift money out of the country at a destabilizing pace. America doesn’t want unbridled dollar strength that would hurt exporters. While the problem could self correct if the greenback loses steam, there are also worries that it won’t.
How about the Trump Tower Accord--especially to help Asia avoid another regional financial dislocation. The US getting its external deficit under control would also be a plus:
One solution could be a "Trump Tower Accord" modeled on the 1985 Plaza Accord named after the New York hotel where it was signed. Like that pact, a new agreement would seek to put a lid on the dollar’s gains...

"A Trump Tower Accord is needed to bring some coordination into the international financial system to avoid the unnecessary negative shocks and uncertainty of uncoordinated policies," Xiao said in emailed remarks...

The risks are especially acute in Asia, home to the world’s fastest-growing economies. A weakening yuan -- it fell to an eight-year low versus the dollar last week -- will pressure regional currencies just as the Fed gears up to lift interest rates for only the second time in a decade. That combination will strain government’s international reserves and pressure companies who borrowed dollar denominated debt. 
Because such a move could worsen the trade deficit, and work against the President-elect’s stated intention to keep American jobs from migrating overseas, “it is hard to rule out” currency intervention as something a Trump treasury department might find politically expedient, Faust said.
As pointed out by the authors, the US dollar was already overvalued by 10-20% at midyear. What more now as the currency has only gained steam since then? Sometimes, the market may need a nudge to set itself right on occasion. That moment is probably now.