The Taiwan greenback’s speedy appreciation within the second quarter led to hypothesis of a “Plaza Accord 2.0” — a coordinated effort to weaken the US greenback — echoing the historic 1985 settlement amongst G5 nations. The unique Plaza Accord was designed to handle massive US commerce deficits by engineering a managed depreciation of the greenback via joint forex intervention. It marked a uncommon and highly effective instance of worldwide forex coordination.
Any new Plaza-style settlement right this moment would face far higher monetary and geopolitical hurdles than it did 40 years in the past. Certainly, if US policymakers search to stimulate home manufacturing by depreciating the greenback, they have to additionally account for the rising prices and dangers related to world commerce, capital flows, and market stability.
This submit examines the potential penalties of a coordinated greenback depreciation right this moment — from FX volatility and insurance coverage threat to broader macroeconomic impacts.
A Weaker Greenback Might Heighten International FX Volatility
A weaker US greenback may have a dramatic impact on the FX market and, particularly, on Taiwanese life insurance coverage firms. A January 2025 FT article identified that these firms maintain property equal to 140% of Taiwan’s GDP. A considerable portion of those holdings are in US-dollar-denominated bonds solely partially hedged for FX volatility.
Taiwan has loved widening present account surpluses due largely to sturdy demand for its semiconductors. To handle the ensuing FX reserve progress and to keep up FX stability, the native financial authority permitted life insurance coverage firms to swap their Taiwan {dollars} for US {dollars} within the FX reserve. The insurers then swapped USD to purchase US fixed-income property to fulfill future (insurance coverage coverage) obligations.
Regardless of shifting the majority of their portfolio property to US {dollars}, many of the insurance coverage insurance policies (agency liabilities) stay denominated in native forex. The consequence can be a big forex mismatch the place sharp declines within the US greenback would scale back the worth of US-dollar-denominated bonds akin to US Treasuries held by Taiwanese insurance coverage firms, leaving the insurance coverage firms with inadequate property to match their liabilities.
The unique Plaza Accord signed by the G-5 nations in 1985 was agreed upon underneath the backdrop of a comparatively benign macro setting. A hypothetical “Plaza Accord 2.0” to depreciate the US greenback would possible improve strain on Taiwan’s insurers and their risk-management efforts. This vicious cycle would exacerbate strain and amplify FX market volatility.
Taiwanese insurance coverage firms are additionally uncovered to period dangers. The US greenback bonds held by Taiwanese insurance coverage firms are longer-duration (with higher rate of interest sensitivity than short-maturity debt). Gross sales of those property would possible carry long-term US rates of interest and transmit rate of interest volatility throughout markets.
Taiwanese insurers should not alone of their publicity to this sort of threat. Comparable carry-trade flows (promote native forex, purchase US greenback and dollar-denominated property) with the Japanese yen within the third quarter of 2024 triggered a brief-but-disruptive volatility surge throughout main asset markets.
The US Commerce Deficit’s Hidden Position
A “Plaza Accord 2.0” coming 40 years after the unique accord would wish to account for the US commerce deficit as a part of a round forex circulation to fund the US authorities. In 1985, the US deficit was at $211.9 billion. By 2024 it had risen to $1.8 trillion. Equally, the US debt ballooned from $1.8 trillion in 1985 to $36.2 trillion within the second quarter this 12 months. Non-US exporters reinvesting commerce surplus {dollars} in US Treasuries (lending surplus {dollars} again to the US authorities) are a key supply of liquidity within the US bond market:
Below the current paradigm, a decrease US commerce deficit would possible disrupt the reinvestment of exporter greenback commerce surpluses, which may cut back overseas demand at US Treasury auctions and negatively have an effect on secondary market liquidity circumstances.
“Plaza Accord 2.0’s” Nuanced Influence On a Leaner US Manufacturing Sector
The US manufacturing sector has developed considerably over the previous 40 years. In keeping with BEA information, the US manufacturing sector’s share of nominal GDP fell to 9.9% in 4Q 2024 from 18.5% in 1985.The full variety of employees within the manufacturing sector additionally declined. In April 1985, manufacturing workers as a share of whole non-farm payrolls was 18.4%. By April 2025, that quantity had dropped to eight.0%. The discount in manufacturing headcount (with improved productiveness, till positive aspects started to stagnate within the late 2000s) implies US manufacturing had develop into extra environment friendly between 1987 and 2007:
Thus, a modified manufacturing trade with comparatively smaller payrolls now than in 1985 would possible profit in a different way from impacts of Plaza fashion accords than 4 a long time in the past, when extra households have been immediately taking part within the trade.
Assessing the Threat Reward of “Plaza Accord 2.0”
Research on the impression of the unique Plaza Accord concluded that trade price shifts finally led to modifications in commerce balances with a lag of two years. The same lag would possible apply right this moment, elevating questions on whether or not a brand new Plaza-style intervention may meaningfully assist US manufacturing — now a leaner, smaller share of GDP — with out triggering broader monetary disruptions. In comparison with 1985, right this moment’s world system is extra interconnected and extra reliant on the greenback, significantly via overseas holdings of US debt. Any coordinated effort to weaken the greenback would wish to stability potential industrial positive aspects in opposition to dangers to FX stability, institutional asset-liability mismatches, and the functioning of US debt markets. The fee-benefit equation for “Plaza Accord 2.0” is much extra advanced than it was 4 a long time in the past.
Requires a “Plaza Accord 2.0” replicate rising concern over US commerce imbalances and industrial competitiveness. However not like in 1985, the worldwide economic system right this moment is extra advanced, with deeper interdependencies and extra fragile monetary linkages. A brand new Plaza-style settlement would carry unintended penalties — from FX volatility and insurance-sector threat in Asia to disruptions in US debt financing and financial coverage transmission.
Below the unique Plaza Accord, forex shifts took years to affect commerce balances, underscoring the lag between intervention and impression. Policymakers should due to this fact assess whether or not the advantages to a leaner US manufacturing base would outweigh the dangers to world markets, institutional stability, and US fiscal operations. On this setting, the risk-reward calculus of forex coordination seems to be much more difficult than it did 40 years in the past.
