Louvre Accord

The Louvre Accord, negotiated by the Group of Seven industrial nations in February 1987, was a coordinated commitment to stabilise exchange rates—particularly the dollar—after it had fallen sharply following the Plaza Accord two years earlier. Rather than allow the dollar to sink indefinitely, the G7 agreed on target ranges (kept secret at first) and pledged to intervene collectively in currency markets to prevent further sharp moves.

The Plaza Accord overshot, and markets kept selling

In September 1985, the G5 (United States, Japan, West Germany, France, Britain) met at the Plaza Hotel in New York and agreed that the dollar, which had soared through much of the early 1980s, was overvalued. They issued a statement endorsing a weaker dollar and coordinated their central banks to sell dollars. The move worked—perhaps too well. The dollar, which had peaked at 260 yen per dollar in 1985, began falling. But by early 1987, it was still falling, and market participants, sensing weakness, kept selling. The dollar had become a one-way bet, with few buyers in sight.

A sharply weak dollar has costs. It makes imports expensive for US consumers and businesses, pushing inflation higher. It also erodes the purchasing power of foreigners holding dollar assets. Japan and West Germany, whose currencies were rising against the weakening dollar, faced their own pressures: stronger currencies made their exports pricier, hurting growth. The original goal—correcting an overvaluation—was being defeated by overshooting.

By February 1987, policymakers concluded that the dollar’s decline had gone far enough and that further weakness posed risks to the global economy. The time had come not to engineer more depreciation but to defend stability.

The accord’s secret target zones

The Louvre Accord was signed on February 22, 1987. Unlike the Plaza Accord, which was explicitly aimed at weakening the dollar, the Louvre was framed as a stabilisation measure. The G7 committed to keeping exchange rates stable at levels that were “consistent with fundamental economic conditions and that would further support economic growth and the reduction of external imbalances.”

The accord was unusual in another way: it included secret target ranges. Ministers and central-bank governors agreed on implicit bands within which they would keep the dollar-yen and dollar-mark rates through coordinated intervention. These ranges were not disclosed publicly; markets were left guessing. The secrecy was intended to avoid giving speculators a clear target to attack, but it also meant that the accord was harder for the public and markets to understand or trust.

On the surface, the accord looked noble: seven wealthy democracies saying they would cooperate to manage volatility. In practice, the secrecy and complexity made it vulnerable to the moment any member deviated from the script.

Why it unravelled in months

The Louvre’s first test came swiftly. The Federal Reserve, under new chair Alan Greenspan, was tightening monetary policy to combat US inflation and support the dollar. Japanese and German authorities, meanwhile, wanted to keep their currencies from rising too much (which would hurt their exporters). Each side had conflicting incentives.

By mid-1987, the dollar was still drifting downward, testing the limits of what the G7 could defend through intervention alone. The accord required active buying of dollars in large size, burning foreign-exchange reserves. By summer, the G7’s patience was wearing thin. The equity markets crashed in October 1987, and the focus shifted away from exchange rates. By 1988, the Louvre target zones had effectively been abandoned, though the accord was never formally repudiated.

The failure had a clear moral: you cannot sustain an exchange-rate target through intervention alone if the underlying economic conditions are misaligned. Japan’s interest rates were low; US rates were high. That interest-rate differential drove capital toward the US, which should have supported the dollar. But US fiscal deficits and trade deficits (the “Twin Deficits”) were large enough that no amount of central-bank coordination could prevent the dollar from feeling downward pressure. The Louvre tried to hold back a tide that fundamental imbalances were driving.

The lesson: intervention without fundamentals is temporary

The Louvre Accord is remembered less as a success and more as a cautionary tale. It showed that G7 cooperation and coordinated intervention, while valuable for smoothing day-to-day volatility and preventing panic, cannot override economic fundamentals. If a country runs a large trade deficit and high fiscal deficit (as the US did in the late 1980s), its currency faces structural downward pressure no matter how many central banks sell other currencies to prop it up.

The accord also revealed the limits of secrecy in international monetary affairs. By keeping the target ranges private, the G7 made the accord harder to defend politically and easier to second-guess. Later coordinated interventions, like the Plaza Accord itself, were explicit and public, making them easier to understand and harder to exploit.

See also