Cathie Wood Says 'Something Similar' To The 80s' Plaza, Louvre Accords Could Happen: Here's What Unfolded Then

Cathie Wood has said the significant appreciation in the dollar led by the ongoing aggressive policy of the U.S. Fed could lead to a situation similar to the Plaza and Louvre accords signed in the 1980s.

What Happened: The Plaza accord was a 1985 agreement signed between the G-5 nations to manipulate the exchange rates to depreciate the dollar against the Japanese Yen and the German Deutsche Mark. In 1987, the Louvre accord was signed to stabilize the international currency markets following the persistent depreciation of the dollar after the signing of the Plaza accord.

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“The UK’s LDI crisis was the first rip in the global financial fabric caused by the Fed’s unprecedented 13-fold interest rate hike. As a result, the BOE has been forced to part company with the Fed and has resumed buying instead of selling gilts,” Wood tweeted.

She also cited examples of how the Bank of Japan and the Chinese central bank are supporting their currencies.

Responding to the dollar’s sharp rise, the BOJ and PBOC are supporting their currencies - selling dollars and buying yen and yuan - while the Swiss National Bank has tapped the Fed’s dollar swap facility for two consecutive weeks, which it never did in 2008-09.

— Cathie Wood (@CathieDWood) October 17, 2022

“Much like in the mid-eighties, other central banks are foreshadowing or calling for an increase in dollar liquidity. In 1985, their calls for Fed/Treasury action culminated in the Plaza and Louvre Accords. We wouldn’t be surprised to see more crises force something similar,” Wood said.

Following aggressive interest rate hikes by the Fed this year, assets across equities to bonds have taken a hit. The SPDR S&P 500 ETF Trust SPY has lost over 25% since the beginning of 2022 while the Vanguard Total Bond Market Index Fund ETF BND has shed over 16% in the same period.

On Yield Curve: Wood continued to highlight her take on inflation, citing the inverted yield curve and comparing it to the 1980s. “@Nancy__davis is highlighting a chart that is flagging the deflationary ramifications of current Fed policy. First, the yield curve has inverted to a level not seen since the early eighties, but -0.5% (50 basis points) on a 4% base is draconian compared to -0.5% on a 15% base,” Wood tweeted.

An inverted yield curve — which indicates short-term yields are higher than long-term ones — is considered to be preceding slowing inflation. What Wood indicates here is that such an inverted yield curve has not been seen since the early 1980s. However, the fed funds rate back then was in double digits as compared to just 4% anticipated by the end of the year.

“Second, despite record-breaking monetary stimulus during COVID, the yield curve steepened only ~half as much in 2020 as “normal” during past crises: 150 basis points vs. 250-300. In other words, the long bond market seemed to be flagging a significant deflationary undertow,” Wood said.

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