Deutsche Bank Warns Fed Shift to Balance Sheet Reduction May Trigger Dollar Weakness

According to Deutsche Bank's recent research report, the Federal Reserve's shift from raising interest rates to balance sheet reduction as its primary monetary tightening tool would be "bearish" for the U.S. dollar. George Saravelos, head of Deutsche Bank's global FX research, cited the Bank of Japan's experience as cautionary; despite conducting QT more aggressively than other G10 economies through large-scale JGB run-off, the yen has still fallen to 40-year lows.

Saravelos emphasized that balance sheet reduction alone does not support currency strength unless accompanied by rising front-end yields. He noted that bear steepening of the U.S. yield curve provides less support to the dollar than flattening, and warned that QT could conflict with the government's goal of maintaining low long-term yields, potentially raising concerns about central bank independence.