Deutsche Bank analyst George Saravelos said in a report on July 16 that the U.S. dollar could weaken if the Federal Reserve shifts the focus of monetary tightening away from interest-rate hikes and toward balance-sheet reduction, or quantitative tightening. He pointed to Japan as a case worth watching: although the Bank of Japan has moved slowly on rate hikes, it has withdrawn liquidity at a record pace through quantitative tightening, while the yen has remained near historical lows. Saravelos also said balance-sheet tightening could create policy friction with the Trump administration, which has clearly signaled that it wants long-term Treasury yields to stay low. He added that the Bank of Japan’s independence remains under market scrutiny, noting that Japanese Finance Minister Katsunobu Kato had even discussed using domestic savings to support the Japanese bond market. The comments were cited by BlockBeats, referencing Jin10.
Deutsche Bank analyst George Saravelos said in a July 16 report that the U.S. dollar could weaken if the Federal Reserve chooses to tighten policy by shrinking its balance sheet rather than relying on further rate hikes.
Saravelos said Japan offers a useful comparison. Even though the Bank of Japan has raised rates only slowly, it has drained liquidity at a record pace through quantitative tightening, while the yen has still remained at historical lows.
He also said balance-sheet tightening could run into policy conflict with the Trump administration, which has made clear that it wants long-term Treasury yields to remain low.
Saravelos added that the Bank of Japan’s independence is still being watched closely by the market. He noted that Japanese Finance Minister Katsunobu Kato had even discussed using domestic savings to support Japan’s bond market.
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