Since 2009 the Fed had bought government bonds, swelling its balance sheet to $4.5 trillion during quantitative-easing programs to stimulate the economy. Gradually reducing the balance sheet by not reinvesting the proceeds and letting maturing bonds expire, the Fed can effectively tighten monetary policy.
Analysts believe that reducing the balance sheet will push borrowing rates and the dollar higher, but possibly in a less aggressive way than an outright rate increase, market analysts say.
An indication of a slowing in hiring, however, weighed on the dollar Thursday. In June, employers added 153,000 jobs, according to payroll processor ADP, below the expected 180,000. Investors are worried that Friday’s jobs report will similarly underperform, placing pressure on the greenback, said Alfonso Esparza, senior currency strategist at OANDA
“Investors are very laser focused on the jobs report,” Esparza said in an interview.
Esparza said concerns about U.S. President Donald Trump not passing pro-growth policies and a perception of diminished American leadership in global affairs are also weighing on the dollar.
The dollar had strengthened slightly against the euro, the yen and emerging-market currencies midweek, as geopolitical tensions escalated ahead of the Group of 20 summit in Germany. On Tuesday, North Korea successfully launched its first ballistic missile capable of reaching the parts of the U.S.
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