Altitude Sickness: Comparing the Political Economy of Two Periods of Extreme Dollar Strength

Abstract

This thesis examines the absence of coordinated international intervention to counter the US dollar’s historic strength in the 2020s, contrasting this with the 1980s episode that culminated in the Plaza Accord. The study employs econometric analysis, historical case studies, and policy research to examine changes in global responses to dollar appreciation, with a focus on structural, cyclical, and geopolitical factors. Structurally, the decline of US manufacturing’s economic and political influence, driven by globalization and a shift toward high-value-added, knowledge-intensive industries (e.g., pharmaceuticals, advanced technology, and product design), along with the shrinkage of low-value-added, labor-intensive sectors such as textiles, has reduced sectoral vulnerability to exchange rate fluctuations. Concurrently, the rise of offshore production and foreign direct investment in critical sectors like automotive manufacturing has further diluted domestic opposition to dollar strength. Cyclically, record postwar corporate profitability and a resilient labor market, characterized by an unemployment rate near 4 percent, and post-COVID-19 labor scarcity, stand in stark contrast to the 1980s, when industrial bankruptcies and double-digit joblessness amplified demands for currency intervention. Geopolitically, reduced systemic risks owing to emerging markets’ improved debt management and greater reliance on local currency financing, the euro’s stabilization of intra-European exchange rates, and China’s strategic aversion to replicating Japan’s Plaza-driven decline have diminished incentives for collective action. The dollar’s rise reflects fundamentals, including growth differentials, energy self-reliance, non-price export competitiveness, and interest rate advantages rather than speculative excess. Meanwhile, inflation-targeting regimes and the Federal Reserve’s domestic mandate preclude monetary easing for currency goals, while US-China strategic rivalry and G20 fragmentation render multilateral coordination implausible. The analysis concludes that absent 1980s-style vulnerabilities, efforts to weaken the dollar lack economic justification or political traction, signaling a paradigm shift from multilateral currency diplomacy to unilateralism in an era of structural decoupling and great-power competition. These findings redefine the role of exchange rates in a multipolar world and challenge assumptions about the feasibility of international economic governance.