Quantitative tightening (QT) is the reverse of quantitative easing (QE). During QE, a central bank buys government bonds and other assets to inject liquidity and push down longer-term yields. During QT, it reduces those holdings — either by letting bonds mature without reinvesting the proceeds, or by actively selling — which drains liquidity from the financial system.
QT is a form of monetary tightening that works alongside interest-rate policy. By removing demand for bonds, it tends to put upward pressure on longer-term yields, which can support the currency through higher rate expectations.
Why it matters for FX
QT affects currencies through two channels. First, by tightening financial conditions and lifting yields, it can strengthen the currency. Second, by draining liquidity, it can reduce risk appetite, which matters for risk-sensitive and safe-haven currencies alike.
The pace of QT is a closely watched policy choice. A faster runoff is more hawkish; a slowdown or pause signals caution. Because QT operates in the background of headline rate decisions, shifts in its pace can move markets even when rates are unchanged.