March third, two thousand twenty-five to March seventh, two thousand twenty-five

I. Foundation 

resistance to change and hence greater dependability for the results shown in the past.

Understanding the Mar-a-Lago Accord in one article

The market is entering a generational transformation of the global trade and financial systems, and Trump’s trade and monetary policies could become a new Market Paradigm Shift. Fundamentally, the dollar’s long-term overvaluation stems from inelastic demand for dollar reserve assets, while the manufacturing sector’s difficulties are attributable to the Triffin dilemma. The United States continually exports Treasury debt to supply global reserves. Although this twin-deficit model gives the United States low borrowing costs (CIP deviates close to zero), it substantially weakens export competitiveness and exacerbates the trade deficit.

The market’s central misconception is to equate tariffs with an inflation shock, but data for 2018-2019 show that CPI & PCE inflation remained stable or even declined during the tariff war. And if tariff measures continue to be accompanied by exchange-rate adjustments, the taxed country may still bear the ultimate tax burden, rather than U.S. consumers.

Dollar appreciation offsets inflationary pressure, and the next adjustment to monetary policy can then correct the impact on manufacturing.

Against the backdrop of the so-called Mar-a-Lago Accord, the strategic path of Trump’s term is to use tariffs as a starting point, reshape global competition rules through trade policy, and at the same time use monetary (FX) tools to offset the structural flaw of the dollar’s long-term overvaluation.

Between 2018 and 2019, the Trump administration sharply raised tariffs, and effective rates on trade with China rose significantly. But the dollar appreciated by almost as much as the tariffs, so import prices denominated in dollars increased only slightly and overall inflation remained stable. This indicates that if dollar appreciation fully offsets the tariffs, the country being taxed will bear the true tax burden. The United States will increase fiscal revenue to achieve Cost-Sharing in Reserve Asset Supply, Through the exchange-rate adjustment mechanism, the tariff burden is ultimately transmitted mainly through currency depreciation in the exporting countries, putting very little pressure on consumer prices, while the U.S. Treasury gains a cost-sharing effect through increased tax revenue.

During the 2018-2019 U.S.–China trade war, the macroeconomic impact of tariffs was smaller than the market expected. The main reason was that exchange-rate adjustments directly absorbed most of the price shock. The depreciation of the renminbi by 13.7% offset the increase of 17.9% in the effective tariff rate, so the final increase in the dollar-denominated price of Chinese imports was only 4.1%.This mechanism strengthened the Trump administration’s understanding of the actual purchasing-power transmission mechanism of tariffs, making it possible that it will push for even more aggressive tariff policies.

The market’s biggest misjudgment of Trump’s policies is underestimating the government’s room to maneuver on exchange-rate policy.

The market is seriously underestimating the policy tools the Trump administration could use to adjust the dollar. The prevailing consensus is that dollar policy depends on Federal Reserve rates, but the Treasury and the Fed are not completely independent, and the Treasury can still impose reserve asset charges through IEEPA (International Emergency Economic Powers Act) to curb inelastic demand for U.S. Treasuries, or directly use the Exchange Stabilization Fund (ESF) to intervene in foreign-exchange markets.

The market generally believes that “dollar policy cannot change,” but from the Plaza Accord (1985) to the Louvre Accord (1987), the United States has actively adjusted the dollar’s valuation several times in its history. Against this backdrop, the Trump team not only emphasizes tariff tools but also expects to adjust the dollar in stages through monetary policy.

Specifically, there are two possible paths:

First is a multilateral coordination plan, similar to the Plaza Accord of 1985 or the Louvre Accord of 1987. The Trump administration may try to advance a “Mar-a-Lago Accord” through coordinated adjustments by trading partners to lower the dollar’s valuation. The practical problem is that Europe, Japan, and Country Z are currently experiencing weak economic growth and have no intention of actively pushing their currencies higher.

If the Trump administration uses tariffs + military umbrella issues Applying negotiating pressure could force some allies to accept a dollar-adjustment framework, but it would be far more difficult than in the 80s.

Second is unilateral action: use tools such as IEEPA and ESF to impose a “usage fee” on U.S. Treasuries held by foreign official institutions, forcing them to adjust their reserve behavior. At the same time, coordinate with SOMA and the Federal Reserve to manage short-term interest rates smoothly and control the long-term yield curve, preventing large-scale foreign capital outflows and a sharp rise in long-term yields caused by dollar depreciation.

Through this approach, the government can not only reduce the dollar’s “excessively high” value in international trade but also shift part of the reserve costs to reserve buyers, thereby maintaining the dollar’s reserve status while weakening its negative impact on U.S. exports.

At the same time, tariffs themselves, as a negotiating lever, their role is reflected not only in increasing fiscal revenue, but also in being reflected in forcing policy concessions from rival countries by raising import costs. For example, during his campaign Trump once proposed raising tariffs on major countries to 60%, and on other countries to 10% or higher. Although such an extreme proposal carries a risk of triggering market volatility, costs can be passed on gradually under a framework of phased implementation and “forward guidance”.

The market generally assumes that tariffs and dollar policy are independent, but the Trump administration’s core strategy is tariffs first, followed by monetary adjustment. Market pricing needs to account for the following path:

1. Short-term dollar strength (Tariff-Driven USD Strength)

2. Tariff revenue improves, increasing the U.S. Treasury’s policy flexibility

3. If global capital flows are constrained, the Treasury launches FX intervention

4. The dollar adjustment path depends on the degree of Federal Reserve cooperation

Overall, against the backdrop of “Mar-a-Lago,”Trump’s strategy is to first rebalance the terms of trade through tariffs, use tariff revenue to improve cost-sharing in the U.S. supply of external reserves, then use exchange-rate policy to strengthen the dollar in the short term, and subsequently use FX Intervention and usage fees on foreign debt to adjust reserve behavior, ultimately restructuring the trade and financial systems as a whole through a series of gradual measures.

The pace of policy adjustments will determine the main source of market volatility over the next 6-12 months.

2025.03.10

Five USDJPY down cycles since 1990

USDJPY has fallen 7% from its peak in 7. Looking back at the five USDJPY down cycles since 1990, we can see that this currency pair typically falls 18% to 47% from its peak within 16 to 60 months:

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Note: All content in this article is for reference only, does not constitute any investment advice, and is not a basis for any laws, regulations, or regulatory policies. Investors should not use or rely on this information as a basis for decision-making.