After a massive multi-year bull market from 1980-1985, the U.S. dollar collapsed. The U.S. dollar was in a massive bear market from March 1985 to mid-1992 (the bulk of the decline was from 1985 – 1987).
Here’s the U.S. Dollar Index. All axis values multiplied by 100x to eliminate decimals.
Why the U.S. dollar was in a bear market from 1985-1987
Money Flow ultimately determines the U.S. dollar’s bull and bear markets.
- When money isn’t decisively flowing in one country’s direction, the USD Index swings sideways in a massive range.
- When money is decisively flowing towards the U.S., the USD is in a big bull market.
- When money is decisively flowing out of the U.S. to a major foreign economic power, the USD is in a bear market.
By 1985, Japan’s economic ascent was clear and Japan’s economy was booming. In addition, U.S. economic growth topped in 1984-1985 and slowly deteriorated until 1990, when the U.S. entered into a recession. Against the backdrop of a booming Japan and a slowing U.S., money flowed decisively to the Far East. Thus, the USD was in a bear market.
For those who are old enough to remember, Japan’s ascent in the 1980s was similar to China’s ascent in the 2000’s. Everyone was afraid that Japan would overtake the U.S. and become the world’s dominant economic power. Japanese car, semiconductor, and tech companies were spanking their American competitors.
As you can see, Japan’s stock market really started to go up in 1983, and skyrocketed in 1986-1987. This was one aspect of “money flow”. Money from around the world (including American investors) piled into Japanese stocks and real estate.
While the U.S. dollar index soared from 1980-1985, USDJPY didn’t really go up at all! When the USD Index topped in early-1985, USDJPY crashed.
Why did the U.S. dollar top in early-1985?
There was a clear event that marked the top of the USD’s bull market in early-1985: Reagan and the G5 devalued the U.S. dollar.
In 1984, Congress threatened to adopt severe protectionist measures (high tariffs) because the U.S. dollar was too expensive. Instead, Reagan intervened before the situation got out of control. At the Group of Five’s meeting on January 17, 1985, the Reagan administration signaled for the first time its willingness to enter the forex market and devalue the soaring USD. During this meeting, U.S. Treasury Secretary Donald Regan joined the other G5 finance ministers in expressing a “commitment to work towards greater market exchange stability”. Over the next 6 weeks, central banks from these 5 countries sold $10 billion.
*The Group of 5 was U.S., UK, France, West Germany, and Japan.
By the time the central bankers stopped selling, the U.S. dollar topped in late-February 1985.
Plaza Agreement in September 1985
After falling from March to mid-August, the USD bounced from mid-August to mid-September 1985.
On September 22, 1985, the Group of 5 met again. This time they signed the Plaza Agreement, which was a formal agreement to depreciate the USD against the German mark and Japanese Yen by intervening in the currency markets.
This stopped the USD’s bounce dead in its tracks. The U.S. Dollar Index collapsed after September 22, 1985.
At this meeting, the G5 announced that they “wanted” to see the U.S. Dollar fall by 40%. The G5 did not make any other major policy changes until February 1987. By February 1987, the USD Index had fallen 40% from its 1985 high of 162. Mission accomplished.