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Weakening dollar, the start of a trend?
25/07/2025
Despite recognizable parallels with developments under the 1985 Plaza Accord, concerns about a very rapid and excessive decline in the U.S. dollar seem exaggerated.
90% of foreign exchange transactions are conducted in U.S. dollars, with approximately USD 7.5 trillion traded on the foreign exchange markets every day.[1] Internationally, 58 percent of reserves are held in dollars.[2] The U.S. dollar remains the most important global currency. Yet it is currently experiencing a phase of weakness, reminiscent of the Plaza Accord period in the 1980s.
In 1985 the dollar had appreciated by 44 percent against a basket of major currencies over five years, driven by a combination of tight U.S. monetary policy and expansionary fiscal policy.[3] This surge in the dollar’s value put increasing pressure on the U.S. manufacturing industry by making exports expensive and imports relatively cheap, and helped to contribute to a growing budget deficit, which reached USD 112 billion in 1984. In response, the Plaza Accord was implemented in 1985 by the G5 nations—France, Germany, the United Kingdom, the United States, and Japan—with the collective aim of weakening the U.S. dollar and boosting domestic demand in Japan and Germany. The strategy proved effective: by 1987, the dollar had fallen by 40%, while the deutschmark and yen had appreciated significantly. By 1991 the U.S. budget deficit had fallen to USD 30 billion.
Parallels between the U.S. dollar now and at the start of the 1985 Plaza Accord
* The U.S. dollar index (DXY) measures the value of the U.S. dollar relative to a basket of six foreign currencies, the euro, the Japanese yen, the British pound, the Canadian dollar, the Swedish krona and the Swiss franc. Before the creation of the euro, the index contained ten currencies—the ones that are currently included (but not the euro), plus the deutschmark, the French franc, the Italian lira, the Dutch guilder, and the Belgium franc. The euro replaced the last five of these currencies.
Sources: Bloomberg Finance L.P., DWS Investment GmbH as of 7/21/2025
Our Chart of the Week highlights that the dollar’s pronounced fall in 2025 so far is following a similar path to the decline in the dollar in the opening phase of the “Plaza Accord” in 1985.[4] There are parallels to the past that suggest continuing depreciation of the dollar in the coming years. The current U.S. president is focused on strengthening the manufacturing sector and reducing the trade deficit. At the same time, political uncertainty in the U.S. is rising, and central banks are gradually reducing their dollar holdings in favor of gold, the euro, or the Chinese renminbi. Meanwhile, European countries are actively stimulating their own economies.
However, the downward trend in the dollar may not be as sharp or rapid as it was in 1985, primarily because there are no coordinated, cross-border agreements in place to weaken the currency. Instead, the shift in the dollar’s value appears to be driven by changing investor sentiment, with growing doubts about the U.S. as a safe haven [5] prompting capital reallocation. “We are closely monitoring the movement of the dollar but don’t currently see any major risks of a massive and rapid devaluation,” explains Xueming Song, currency strategist at DWS. The dollar remains the undisputed global currency due to its high liquidity, its status as the most traded currency in the world, the size of the U.S. economy, and the depth and efficiency of its financial markets. At present, there is no realistic single alternative capable of replacing it. Our longer-term forecasts assume continued weakening in the U.S. currency, but not a dramatic devaluation comparable to the “Plaza Accord.”[6]