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Currency market: Fix the rules. Avoid a trade war.

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When those rates no longer reflected reality, those nations came together again in 1973 to craft the Smithsonian Agreement, which in effect gave the US a small devaluation of the dollar. President Nixon hailed it as "the greatest monetary agreement in the history of the world" (a statement your correspondent missed because, having wandered outside Smithsonian Castle, he got locked out when Nixon suddenly arrived for his press conference.)

Nixon's evaluation didn't prove true. The world's greatest monetary agreement lasted only 14 months. The fixed exchange rate system broke down, giving way to a "floating" system where the price of the dollar and other major currencies was set largely by supply and demand on foreign-exchange markets. The greenback promptly lost 20 percent, which helped rebalance world trade.

The Smithsonian deal created a troubling legacy: Developing countries weren't covered by the currency agreement. Most of them continue to fix their foreign exchange rates by intervening in the market.

Some nations – notably Japan and, later, China – exploited that loophole by keeping their currencies artificially low to boost exports and their industries. In 1985, the Plaza Accord negotiated by the US, France, West Germany, Britain, and Japan put an effective end to Japan's currency manipulation. By 1987, the dollar had lost 51 percent of its value against the yen, making Japanese exports much less competitive.

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