WORLD INTERVENES AGAINST STRONG DOLLAR (1985–1987) AND FALLING DOLLAR AND OIL: A BOON FOR NON-USD IMPORTERS
WORLD INTERVENES AGAINST STRONG DOLLAR (1985–1987)
The excessive strength of the U.S. dollar proved detrimental to the world economy. The U.S. trade gap moved sharply into a deficit and millions of manufacturing jobs were lost. Sharp depreciations in the currencies of the United States’ trading partners triggered surging inflation that required cen-tral banks to tighten aggressively, sending their economies into recessions.
After 10 ineffective attempts of currency intervention aimed at sta-bilizing the dollar between 1981 and early 1985, the world’s five biggest economies waged a global coordinated campaign to reverse the dollar’s ascent. The dollar had already peaked in February 1985 before starting a gradual retreat over the next six months. The decline was especially helped by Fed rate cuts in the second half of 1984 while rates remained unchanged in West Germany and Japan, and rising in the United Kingdom.
Despite the dollar’s 4 percent decline from its February peak to September, world leaders wanted more. In September 1985 at the Plaza Hotel in New York, representatives from the Group of Five (United States, Japan, Germany, United Kingdom, and France) agreed on coordinated op-erations to support non-U.S. dollar currencies. A series of joint interven-tions totaling nearly $13 billion in dollar-selling operations by the G5 over the following five weeks helped bring down the dollar. The interventions worked: The dollar lost 20 percent from September to December 1985, before shedding another 27 percent in 1986.
FALLING DOLLAR AND OIL: A BOON FOR NON-USD IMPORTERS
The oil factor once again played a prominent role in currency markets. As the oil price drop of the mid-1980s intensified—resulting from slumping world demand and OPEC’s price declines—oil importing nations benefited significantly over time. The combination of a depreciating dollar and falling oil prices proved a boon for major oil importers, whose strengthening cur-rencies increasingly absorbed cheaper oil, priced in a lower U.S. dollar. In the early 1980s, West Germany and Japan were the two countries with the highest dependence on imported oil as measured in terms of their overall economy.
Figure 2.10 shows Japan to have moved from being highly oil-import-dependent during the early 1980s—with an oil import/GNP ratio of 5.5 percent—to reducing its dependence fivefold over the following five years to become the most energy-efficient country in the industrialized world. An expanding Japanese economy and a strong yen were major
The excessive strength of the U.S. dollar proved detrimental to the world economy. The U.S. trade gap moved sharply into a deficit and millions of manufacturing jobs were lost. Sharp depreciations in the currencies of the United States’ trading partners triggered surging inflation that required cen-tral banks to tighten aggressively, sending their economies into recessions.
After 10 ineffective attempts of currency intervention aimed at sta-bilizing the dollar between 1981 and early 1985, the world’s five biggest economies waged a global coordinated campaign to reverse the dollar’s ascent. The dollar had already peaked in February 1985 before starting a gradual retreat over the next six months. The decline was especially helped by Fed rate cuts in the second half of 1984 while rates remained unchanged in West Germany and Japan, and rising in the United Kingdom.
Despite the dollar’s 4 percent decline from its February peak to September, world leaders wanted more. In September 1985 at the Plaza Hotel in New York, representatives from the Group of Five (United States, Japan, Germany, United Kingdom, and France) agreed on coordinated op-erations to support non-U.S. dollar currencies. A series of joint interven-tions totaling nearly $13 billion in dollar-selling operations by the G5 over the following five weeks helped bring down the dollar. The interventions worked: The dollar lost 20 percent from September to December 1985, before shedding another 27 percent in 1986.
FALLING DOLLAR AND OIL: A BOON FOR NON-USD IMPORTERS
The oil factor once again played a prominent role in currency markets. As the oil price drop of the mid-1980s intensified—resulting from slumping world demand and OPEC’s price declines—oil importing nations benefited significantly over time. The combination of a depreciating dollar and falling oil prices proved a boon for major oil importers, whose strengthening cur-rencies increasingly absorbed cheaper oil, priced in a lower U.S. dollar. In the early 1980s, West Germany and Japan were the two countries with the highest dependence on imported oil as measured in terms of their overall economy.
Figure 2.10 shows Japan to have moved from being highly oil-import-dependent during the early 1980s—with an oil import/GNP ratio of 5.5 percent—to reducing its dependence fivefold over the following five years to become the most energy-efficient country in the industrialized world. An expanding Japanese economy and a strong yen were major
FIGURE 2.10 Japan’s oil dependence, measured by oil imports as a percentage of gross national product, was reduced by five times into the end of the decade.
contributors in reducing the relative value of oil imports. The decline in West Germany’s oil dependence during the latter half of the decade was far more modest, mainly due to slowing economic growth.
As concerted dollar-selling intervention took full force in autumn 1985, so did the decline in the currency. By January 1986, the dollar had dropped 9 percent from its February 1985 peak and its positive impact on the dollar cost of Japanese and West German oil imports became more evident. The windfall on these economies’ external trade balance was especially ampli-fied by the 1986 decline in oil prices. Not only were they paying for cheaper oil but it required fewer Deutsche marks and yen to pay for it. Their imports fell relative to their exports, triggering a vital flip to their overall growth and further boosting their currencies.
contributors in reducing the relative value of oil imports. The decline in West Germany’s oil dependence during the latter half of the decade was far more modest, mainly due to slowing economic growth.
As concerted dollar-selling intervention took full force in autumn 1985, so did the decline in the currency. By January 1986, the dollar had dropped 9 percent from its February 1985 peak and its positive impact on the dollar cost of Japanese and West German oil imports became more evident. The windfall on these economies’ external trade balance was especially ampli-fied by the 1986 decline in oil prices. Not only were they paying for cheaper oil but it required fewer Deutsche marks and yen to pay for it. Their imports fell relative to their exports, triggering a vital flip to their overall growth and further boosting their currencies.
PLEASE READ ALSO : IRAQ’S INVASION OF KUWAIT AND THE GULF WAR (1990–1991) AND THE ASIAN CRISIS AND OPEC’s MISCALCULATION (1997–1998)
To better illustrate the positive impact on the West German and Japanese currencies from falling oil prices and a falling dollar, one could compare the impact on the British pound during the 1986 oil price de-cline (see Figure 2.11). Unlike Japan and West Germany, the United King-dom had far lower dependence on imported oil, partly due to its status as an exporter of North Sea oil. Consequently, the windfalls of the oil price plunge were manifested more strikingly in Japan and West Germany than in the United Kingdom. The impact on its currency was evident. Against the backdrop of the 1986 plunge in oil prices, the British pound edged up
FIGURE 2.11 Superior percentage gains were made in the deutsche mark and Japanese yen against the U.S. dollar during the 1986 oil decline due to these nations’ oil import capacity relative to the United Kingdom.
3 percent against the dollar, while the deutsche mark and the Japanese yen both soared 21 percent.
Less than five years after staging a remarkable 49 percent rally be-tween 1980 and 1984, the U.S. dollar made an equally memorable 40 percent plunge in the ensuing two years. By the end of 1987, the currency lost all of the gains incurred at the first half of the decade. Once again, the world’s top economies had to intervene, this time to support the falling dollar. The Louvre Accord of February 1987 was reached to stabilize the falling dollar and help other countries halt costly appreciations in their currencies. Both the dollar and oil eventually stabilized in 1988 and 1989, until Iraq’s 1990 invasion of Kuwait drove prices to an eight-year high, creating a new oil price shock.
3 percent against the dollar, while the deutsche mark and the Japanese yen both soared 21 percent.
Less than five years after staging a remarkable 49 percent rally be-tween 1980 and 1984, the U.S. dollar made an equally memorable 40 percent plunge in the ensuing two years. By the end of 1987, the currency lost all of the gains incurred at the first half of the decade. Once again, the world’s top economies had to intervene, this time to support the falling dollar. The Louvre Accord of February 1987 was reached to stabilize the falling dollar and help other countries halt costly appreciations in their currencies. Both the dollar and oil eventually stabilized in 1988 and 1989, until Iraq’s 1990 invasion of Kuwait drove prices to an eight-year high, creating a new oil price shock.
0 Response to "WORLD INTERVENES AGAINST STRONG DOLLAR (1985–1987) AND FALLING DOLLAR AND OIL: A BOON FOR NON-USD IMPORTERS"
Post a Comment