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A rapid praise of Taiwan dollar in the second quarter caused speculation of “Plaza Accord 2.0” – a coordinated attempt to weaken the US dollar – the 1985 historical agreement between the G5 nations. The original Plaza Accord was designed to address a large American trade deficit by engineering through joint currency intervention. This marked a rare and powerful example of global currency coordination.
Any new plaza-style agreement will face more financial and geopolitical obstacles than 40 years ago. Indeed, if American policy makers want to encourage domestic manufacturing by depreciation of the dollar, they should also be responsible for the emerging costs and risks associated with global trade, capital flow and market stability.
This post today examines the potential results of a coordinated dollar depreciation – from FX volatility and insurance risk to comprehensive economic impacts.
A weak dollar may increase global FX volatility
A weak US dollar can have a dramatic impact on FX market and especially on Taiwan’s life insurance companies. An article of January 2025 feet said that these companies hold assets equal to 140% of Taiwan’s GDP. A large part of these holdings is in the US-Dollar-incasted bond which is partially handed partially for FX volatility.
Taiwan has enjoyed the widening of the current account surplus due to a large part for the strong demand of its semi -circulars. To manage the resulting FX reserve development and maintain FX stability, the local monetary authority allowed life insurance companies to swap their Taiwan dollars for US dollars in the FX reserve. The insurers swap USD to buy US fixed-incredes assets to meet the future (insurance policy) obligations.
Despite transferring bulk of its portfolio assets to US dollars, most insurance policies (firm liabilities) are shown in local currency. The result will be an important currency mismatched where a sharp decline in the US dollar was organized by the US-dollar-communal bonds such as Taiwanese insurance companies such as American Treasury, the insurance companies were left with insufficient assets to match their liabilities.
In 1985, the original plaza agreement signed by the G -5 countries agreed to the backdrop of a relatively benign macro environment. A fictional “Plaza Accord 2.0” to reduce the US dollar is likely to increase pressure on Taiwan’s insurers and their risk-management efforts. This vicious cycle will increase pressure and FX will increase market volatility.
Taiwan’s insurance companies are also exposed to the risks of the period. The US dollar bonds conducted by Taiwanese insurance companies are long-term (with higher interest rate sensitivity than low-periphelies loans). The possibility of selling these assets will raise long -term US interest rates and transmit interest rate instability in the markets.
Taiwan’s insurers are not exposed to this type of risk. In the third quarter of 2024, similar carry-trade flows with Japanese yen (sell local currency, buy US dollars and dollars and valuable assets) Major asset markets increase a brief-butter disruptive instability,
Hidden role of American trade deficit
A “Plaza Accord 2.0” coming 40 years after the original agreement should be responsible for the US trade deficit as part of a circular currency flow to fund the US government. In 1985, the US deficit was $ 211.9 billion. By 2024 it had increased to $ 1.8 trillion. Similarly, the US loan moved to the balloon from $ 1.8 trillion in 1985, to $ 36.2 trillion in the second quarter this year. Non-US exporters re-established the trade surplus dollar in the US Treasury (back to the US government) is a major source of liquidity in the US bond market:
Under the current paradigm, a low American trade deficit will probably disrupt the regeneration of exporter dollar trade surpluses, which can reduce foreign demand in the US Treasury auction and negatively affect the state of secondary market liquidity.
“Plaza Accord 2.0” fine effect on a lean American manufacturing sector
The American manufacturing sector has developed considerably in the last 40 years. According to BEA data, the nominal GDP part of the US Manufacturing sector fell to 9.9% in 1985 to 9.9% in 2024. The total number of workers in the manufacturing sector also declined. In April 1985, manufacturing workers were 18.4%as part of the total non-agricultural payroll. By April 2025, this number had come down to 8.0%. A decrease in manufacturing headcount (with better productivity, until the benefits began to stabilize in the late 2000s) means that American manufacturing became more efficient between 1987 and 2007:
Thus, compared to 1985, now a converted manufacturing industry with relatively small payroll will be different from the impacts of the Plaza style agreement compared to four decades ago, when more houses were directly participating in the industry.
Estimating the risk reward of “Plaza Accord 2.0”
The study on the influence of the original plaza agreement concluded that the exchange rate change eventually led to a change in trade balance with an interval of two years. The possibility of an uniform interval will be applicable today, questioning whether the intervention of a new plaza-style can be meaningfully supported American manufacturing-now a lean, small part-user of GDP without triggering financial disruption. Compared to 1985, today’s global system is more interconnected and more dependent on the dollar, especially through foreign holdings of American debt. Any coordinated attempt to weaken the dollar will require to balance FX stability, institutional asset-liability mismatched and balanced industrial gains against risks for the functioning of American debt markets. The cost-profit equation for “Plaza Accord 2.0” is far more complicated than four decades ago.
Calls for “Plaza Accord 2.0” reflect American business imbalance and increasing concern over industrial competition. But unlike 1985, the global economy is more complex today, with deep interdependence and more delicate financial relations. A new plaza-style agreement will take unexpected results-from FX volatility and insurance-field risk to US debt financing and monetary policy transmission disruption.
Under the original Plaza Accord, the currency innings took years to affect the business balance, underlined the interval between intervention and impact. Therefore policy makers should assess whether the benefits for a lean American manufacturing base will overtake the global markets, institutional stability and risks to American fiscal operations. In this environment, the risk of currency coordination is more complicated than 40 years ago.
