The Plaza Accord aimed to depreciate the US dollar in relation to the Japanese yen and German Deutsche Mark, which was agreed upon at the G7 Minister of Finance meeting held in Louvre in Paris in 1985. The U.S. Dollar was devalued to promote growth around the world, since developing nations were in debt and unable to participate in positive trade. In addition, the United States had a trade deficit. Japan and a few European countries were experiencing a trade surplus along with negative GDP growth, which affected foreign trade for these countries.
After the Plaza Accord, the dollar rate continued to slide, reaching an exchange rate of ¥150 per US$1 in 1987. The ministers of the G7 nations gathered at the Louvre in Paris to minimize this decline. The Louvre Accord helped prevent a recession because it stopped the value of the U.S. Dollar from decreasing any further in relation to other currencies. The Louvre Accord helped avoid a domestic recession because it could have possibly affected the economies of other nations, which could have caused global economic stagnation.
France agreed to reduce its budget deficits by 1% of GDP and cut taxes by the same amount for corporations and individuals. Japan would reduce its trade surplus and cut interest rates. Great Britain would agree to reduce public expenditures and reduce taxes. Germany, the real object of this agreement because of its leading economic position in Europe, would agree to reduce public spending, cut taxes for individuals and corporations, and keep interest rates low. The United States would agree to reduce its fiscal 1988 deficit to 2.3% of GDP from an estimated 3.9% in 1987, reduce government spending by 1% in 1988 and keep interest rates low.
The dollar continued to weaken in 1987 against the Deutsche Mark and other major currencies, reaching a low of 1.57 marks per dollar and 121 yen per dollar in early 1988. The dollar then strengthened over the next 18 months, reaching over 2.04 marks per dollar and 160 yen per dollar, in tandem with the Federal Reserve raising interest rates aggressively, from 6.50% to 9.75%.