Most meetings of the IMF offer no more than scraps for news-hungry journalists. The annual confab in Washington next week could provide red meat.
A powerful rally in the US dollar over the past 18 months has battered some markets. The chance of a financial accident has increased. Bankers increasingly namecheck the 1985 Plaza Accord.
This was a multinational deal struck by finance ministers and central bankers to restrain the dollar. A surge in the early 1980s had lifted the currency about 78 per cent over almost five years. Co-ordinated rate rises and currency market intervention ensued.
“Plaza Accord: The Sequel” would play well in countries such as the UK, which import the dollar-priced commodities that add to inflation. No movie is in development yet. But a statement from the IMF promising to counter dollar strength would represent an elevator pitch for one.
The speed of the recent dollar move is notable, says Simon Quijano-Evans at investors Gemcorp. A similar jump in 2015 presaged the postponement by the US Federal Reserve of a promised series of interest rate increases.
A fresh pushback against the dollar could trigger another risk-on rally. Emerging markets would benefit, says Rob Buckland at Citi. Prices for relevant equities — equivalent to 10 times forward earnings, according to Bloomberg data — sit near decade lows.
Growth stocks, including technology shares, suffer when inflation-adjusted US bond yields rise. This year, real yields have hit heights not seen since 2010. Investors should also buy precious metals, including gold, and companies that mine them.
The currency’s strength has bolstered some assets. UK equities have proved their worth to value investors this year, outpacing the broader world index. MSCI recently gave its 2022 UK earnings per share growth forecast a 45 per cent upgrade.
A reboot of the Plaza Accord is for the moment fantasy economics. It may remain so if the dollar weakens naturally in tandem with growth. But the unique strengths of the US economy mean an international party to bash the greenback is a scenario investors should include in their planning.
The Lex team is interested in hearing more from readers. Please tell us what you think of the idea of concerted action to tame the dollar in the comments section below
