Incredible similarity? After the "Plaza Accord," the "dollar fell, and the stock market boomed," followed by the new Federal Reserve Chairman taking office, and then "Black Monday."

The depreciation of the dollar, new highs in the U.S. stock market, and the change of the Federal Reserve Chairman... History from forty years ago is repeating itself. Will "Black Monday" make a comeback?

Since the beginning of this year, with Trump returning to the White House, the dollar exchange rate has continued to weaken, with the dollar index falling nearly 10% cumulatively, and the dollar against major currencies once dropping to a nearly three-year low. At the same time, driven by rising expectations of easing and a thaw in trade tensions, the S&P and Nasdaq have repeatedly set historical highs.

Historically, after the signing of the "Plaza Accord" in 1985, the U.S. market also experienced a similar period of "sharp dollar depreciation and soaring U.S. stocks."

According to news from the Chasing Wind Trading Desk, Richard Koo, Chief Economist at Nomura Securities, pointed out in a recent research report that the "Plaza Accord" of 1985 initiated a period of sharp dollar depreciation while the U.S. stock market repeatedly reached new highs, which is "very similar" to the current prosperity of the U.S. stock market.

The report shows that within 17 months after the signing of the "Plaza Accord," the dollar fell 36.5% against the yen and 30.8% to 36.6% against major European currencies such as the German mark, French franc, and Italian lira. Despite significant adjustments forced upon the real economies of various countries, U.S. stock prices continued to soar to historical highs, much like today.

This seemingly contradictory prosperity was largely due to the market's judgment that inflation was not out of control at the time, especially under the leadership of then-Federal Reserve Chairman Paul Volcker, whose outstanding anti-inflation reputation provided confidence support for the market.

However, this optimism quickly collapsed two years later with the change in the Federal Reserve leadership and hesitance in policy responses, ultimately culminating in the stock market crash of "Black Monday" in October 1987.

Now, with the Federal Reserve Chairman also facing "leadership change" and the outlook for policy interest rates becoming complex, will the U.S. stock market once again follow the "old path" of 40 years ago?

Prosperity After the "Plaza Accord": Dollar Decline and Stock Market Frenzy

The report points out that the core of the "Plaza Accord" was to allow for an orderly depreciation of the dollar to correct trade imbalances, but no one could predict the depth of the dollar's decline.

In the face of enormous uncertainty, exporters from various countries, including Japan, chose to compress their profit margins to maintain their market share in the U.S., trying to avoid raising export prices.

The result of this strategy was that, in about a year and a half after the agreement took effect, despite the significant depreciation of the dollar, U.S. import prices did not see a significant increase. At the same time, coinciding with a sharp drop in international oil prices, this further effectively curbed overall inflationary pressures.

In this macroeconomic context, despite the global economy experiencing uncertainty and anxiety due to exchange rate fluctuations, the Dow Jones Industrial Average continued to set historical highs, and the stock market exhibited a scene of prosperity

"Inflation Fighter" Volcker Takes Action to Stabilize the Market

The report points out that, in fact, the market's confidence at that time largely relied on the personal credibility of Federal Reserve Chairman Volcker.

Just five years before the signing of the "Plaza Accord," Volcker had successfully curbed the most severe double-digit inflation in U.S. history with an iron-fisted approach. Therefore, the market generally believed that as long as Volcker was in office, inflation would not become a serious problem.

However, this confidence was severely tested at the end of March 1987 (the end of Japan's fiscal year). At that time, the exchange rate of the dollar against the yen fell below the 150 yen lower limit set in the Louvre Accord. The report noted that this made Japanese investors feel "deceived" by the U.S., believing that the U.S. had no intention of adhering to the agreement, and thus began to sell off dollars and dollar-denominated bonds on a large scale. This move led to a surge in U.S. Treasury yields, while Japanese government bond yields plummeted.

Upon realizing that the real reason for the surge in long-term interest rates was the sell-off by Japanese investors, Chairman Volcker immediately issued a statement, stating that he was prepared to raise interest rates to stop the decline of the dollar.

This statement quickly stabilized market sentiment, the dollar exchange rate returned above 150 yen, and U.S. Treasury yields fell in response, once again demonstrating the immense power of Volcker's personal credibility.

The Fatal Transition: Greenspan's Silence and "Black Monday"

In August 1987, Alan Greenspan succeeded Volcker as the new Chairman of the Federal Reserve.

However, the market consensus regarding "150 yen is the key defense line for the dollar" seemed not to have been effectively communicated to the new leadership. When the dollar exchange rate fell below 150 yen again, Greenspan took no action. The report analyzes that this made Japanese investors feel "betrayed" once more and they began to sell off dollars and dollar bonds again.

Meanwhile, another more severe issue emerged: the core CPI inflation rate in the U.S. soared to a high range of 3% between April and July, further rising to 4.3% in August, and accelerating to 4.5% in October.

The combination of these two factors dealt a fatal blow to the market. In just two months, the yield on 30-year U.S. Treasury bonds surged by 1.2 percentage points. The violent turmoil in the bond market eventually spread to the stock market, directly triggering the "Black Monday" crash on October 19.

What If Volcker Were Still in Office?

The 1987 case holds significant implications for today. The report even hypothesizes that if Volcker had still been the Chairman of the Federal Reserve at that time, "Black Monday" would likely not have occurred.

The report infers that if Volcker were still in office, he would not have "stood by" when the dollar fell below the 150 yen mark again in mid-August that year. Based on his past style of action, he would most likely have clearly announced his readiness to raise policy rates to defend the dollar and curb inflation, just as he had before. Considering Volcker's authoritative position in the market at the time, the report believes that such a statement was sufficient to reassure the market, preventing a drastic surge in long-term interest rates and potentially averting the occurrence of "Black Monday."

In other words, the personal reputation of the Federal Reserve Chairman and the market's confidence in his policy commitments played a decisive role at critical moments. When the market begins to doubt the central bank's determination to combat inflation, even relatively minor policy missteps can trigger severe turmoil in the financial markets.

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