Strong dollar policy

The term "exchange rate weapon" was introduced by Professor of International Economic Relations at the School of International Service at American University Randall Henning to describe the threat of manipulating the exchange rate of a strong country's currency with that of a weak country's currency, in order to extract policy adjustments from their governments and central banks.[2] The strong dollar policy arose in response to the use of the exchange rate weapon.

A strong currency helps domestic importers as their currency buys more, benefits foreign exporters as their exports garner more, hurts domestic exporters as there are not as many foreign buyers, and harms foreign importers as they cannot buy as much. A weak currency does the opposite of the above. They are summed up in the tables below.[3]

In spite of the Bretton Woods agreement, United States (U.S.) officials suspended gold convertibility and imposed a ten percent surcharge on imports in August 1971. This prompted the G-10 Smithsonian Agreement, a temporary agreement negotiated in 1971 among the ten leading developed nations in the world. The agreement pegged the Japanese yen, the Deutsche Mark, and the British pound sterling and French franc at seventeen percent, fourteen percent, and nine percent, respectively, below the Bretton Woods parity.[4] These proved unsustainable.[5] Later in 1971, U.S. officials permanently floated the dollar; a second devaluation of the dollar against major currencies and a permanent “float” of major European currencies against the dollar followed in February 1973.[6] When the dollar fell in value, the U.S. did little to slow or reverse the fall; this dollar slump incentivized European and Japanese officials to deliver expansionary policies.[7]

In 1977 the Carter administration advocated and initiated the “locomotive theory”, which posits that big economies pull along their smaller brethren. Carter’s theory asked for concessions from the smaller countries to benefit the U.S. for the high price the U.S. has incurred for their benevolence after the 1973-75 recession.[8] The American initiative met with staunch German and Japanese resistance at first. In response, U.S. authorities let it be known that they would allow the dollar to depreciate against the dissenting countries' currencies in the absence of macroeconomic stimuli.[9] Eventually, Japanese prime minister Takeo Fukuda agreed to the U.S. stimulus request in late 1977.[10] A year later at the Bonn Economic Summit in July 1978, German Chancellor Helmut Schmidt acceded to expansionary fiscal policy as a part of a package of mutual concessions.[11][12][13]

There was a twenty-six percent appreciation of the dollar between 1980 and 1984[14] as the result of a combination of tight monetary policy during the 1980-82 period under Federal Reserve Chairman Paul Volcker and expansionary fiscal policy associated with Ronald Reagan's administration during the 1982-84 period. The combination of these events pushed up Long-term interest rates, which in turn attracted a capital inflow and appreciated the U.S. dollar.[7] The 1981-84 Reagan administration had an explicit policy of "benign neglect" toward the foreign exchange market.[15][16] Some U.S. trade partners expressed concerns over the magnitude of the dollar's appreciation, advocating for intervention in the foreign exchange market in order to dampen such moves.[7] However, Secretary of the Treasury Donald Regan and other administration officials rejected these notions, arguing that a strong dollar was a vote of confidence in the U.S. economy.[17] At the Versailles Summit of G-7 leaders in 1982, the U.S. agreed to the requests of other member nations to allow an expert study of the effectiveness of foreign exchange interventions. The eponymous "Jurgenson Report", named after its lead researcher Phillipe Jurgenson, was submitted to the 1983 Williamsburg Summit where the requesting nations were disappointed that the findings did not support their advice.[18][19][20] Only slightly deterred, the Plaza Accords in 1985 occurred. (The Plaza Accords were an impetus for the G-7 Finance Ministers as the group of officials that had met in New York were the first officials for it.)[15][21] However, the U.S. began “talking down” the dollar further in order to encourage stimuli to domestic demand in Japan and Germany.[2]

In 1992, following a recession with a slow recovery and a delayed response in the labor markets, Bill Clinton's administration signaled the desirability of yen appreciation against the dollar: "I would like to see a stronger yen.”[22] Also, in February 1993, then-Treasury Secretary Lloyd Bentsen reiterated the position when he was asked if he'd like to see a weaker dollar.[23] These comments were to influence the USDJPY so as to protect against Japanese export-growth at the expense of the U.S. current account position.[2] Afterwards, the dollar slumped against the yen, moving the yen to the 100 level against the dollar in the 1993 summer.[24]