Joseph J461 Allen

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What is quantitative tightening (QT) and its forex impact?

Quantitative tightening is the reversal of QE—central banks shrink balance sheets by selling assets or letting them mature. QT drains liquidity, raises yields, and typically strengthens the domestic currency. For example, Fed QT cycles often boost the dollar by attracting capital to higher yields. However, QT can spook markets, triggering risk-off flows into USD, JPY, or CHF. Institutions monitor QT pace, auction demand, and liquidity spreads. Retail traders should watch central bank calendars and statements, as QT shifts impact risk sentiment globally. Benefits: currency strength, inflation control. Risks: financial instability and liquidity crunches. QT is crucial because its effects ripple beyond rates, reshaping forex through global capital flow realignments.