By Mike Dolan

LONDON (Reuters)

There is a persistent murmur in financial markets that the Trump administration may push through a grand bargain to weaken the overvalued U.S. dollar. However, multiple problems exist, including Europe’s likely unwillingness to participate.

For any re-enactment of the dramatic 1985 “Plaza Accord”—which aimed to weaken a then-stratospheric dollar exchange rate and ease America’s widening deficits—the name itself provides a clue: “Accord.”

Although Washington could theoretically offer a deal in exchange for shelving threatened import tariffs, there is considerable doubt that coordinated dollar sales would make sense beyond creating financial volatility. Furthermore, doubts exist regarding whether Eurozone nations would be willing or able to participate.

The European Central Bank reiterated its commitment to credit easing on Thursday as the Eurozone economy struggles amid various uncertainties. This situation, in contrast to a hotter U.S. economy and a tighter Federal Reserve, largely explains the dollar’s prevailing strength—along with years of significant westward investment flows into high-performing U.S. equity and debt.

Further easing by the ECB is likely over the rest of the year, and a weaker euro, not far from record highs on a broader trade-weighted basis, is considered integral to any recovery and rebalancing plan. Agreeing to weaken the dollar in this context would seem counterproductive in Frankfurt.

Similar arguments could be made regarding China, although there is a direct negotiation line with Beijing on this issue. Even if “realpolitik” allowed for convergence between Trump’s administration and other governments in North America or Asia, it remains unclear how it would work within Europe.

While EU treaties vaguely mention euro finance ministers’ collective role in shaping exchange rate policy, implementing that during a global intervention remains unclear. Historically, the multi-national ECB has held significant authority in these matters.

As the ECB is bound by domestic inflation and financial stability mandates, its ability to engage in political horse-trading on its own quite limited. There is also uncertainty regarding its capacity to take direction from the Eurozone group on such matters.

The euro has often been described as “a currency beyond the state,” which also applies to its potential as a political bargaining chip. A move based on global financial stability priorities could possibly provide the ECB some cover. However, any quid pro quo resulting from political pressure from Washington or Brussels poses complications, especially regarding the ECB’s role as the guardian of the single currency.

‘PLAZA2’ PIPE DREAM?

Yet, discussions about a global deal linger, partly because investors view the dollar’s 35% appreciation over the past decade as similar to its 40% surge leading up to the Plaza Accord under U.S. President Ronald Reagan.

Currency fund manager Stephen Jen recently made a playful case for a “Mar-a-Lago Accord” on the 40th anniversary of Plaza this September. His points included that China may not be as opposed to a tariff intervention deal as assumed, and that the cyclical weaknesses in China and Europe may shift later this year.

Warnings about expanding U.S. trade gaps, unfair practices, and currency manipulation have marked Trump’s initial days in office. Thus far, he has avoided comments from advisers about moves to devalue the dollar, keeping his focus on the dollar’s overvaluation during the 2024 presidential campaign.

An executive order on “America First Trade Policy” has set Treasury Secretary Scott Bessent with proposing measures to address currency manipulation or misalignment that hampers effective balance of payments adjustments. Commerce and trade officials are tasked with monitoring this issue and designing an appropriate response.

The Trump team’s main challenge with tariff threats, however, is that markets seem to view them as reasons to buy dollars rather than sell. This is due to potential economic damage inflicted on the affected economies and currencies, alongside the assumption that these tariffs could be inflationary and keep U.S. interest rates high.

This scenario presents several contradictions in the proposed policy stance, especially given Bessent’s insistence on maintaining the dollar’s dominant global role. Mark Sobel, a former U.S. Treasury official now leading OMFIF, noted the Trump team’s ongoing “confusion” on currency issues.

Sobel emphasized that American deficits are inherently American problems, which foreigners cannot resolve. He questioned both U.S. tax and tariff plans as well as misguided attempts to measure equilibrium exchange rates scientifically. He contended that dollar overvaluation would only dissipate when the overwhelming investment bias towards the U.S. economic and corporate performance reverses.

In summary, don’t expect a grand currency bargain involving the pivotal euro/dollar exchange rate anytime soon.

The opinions expressed here belong to the author, a columnist for Reuters.

(By Mike Dolan; Editing by Paul Simao)