In Warsh's testimony this weeek, he emphasized to the House Financial Services Committee that his annoucned review of the Fed's $6.8 trillion balance sheet would also look at the 'ample-reserves' regime that requires it to maintain large holdings of bonds.This harkens back to Warsh's first term as Fed Governor when he resigned in 2011 over QE and the Fed's growing balance sheet. That never turned out to be the problem he thought it would be, but it may be a battle he wants to fight again."I'm not of the mistaken view we can go back to where we were when I arrived at the Fed in 2006, but I think there are several other sustainable equilibrium we can achieve," he said.Prior to the financial crisis, the Fed held less than $1 trillion in Treasuries.There is talk that instead of rate hikes, the Fed under Warsh could aim to tighten policy via drawing down reserves. What would that mean for the dollar? As Deutsche Bank highlights, we don't have to look far for a precedent as that's exactly what the Bank of Japan has been doing.They see two lessons:"First, balance sheet tightening is not especially bullish for the currency if it is not accompanied by higher front-end yields. Look no further than the record lows in the trade-weighted yen," writes George Saravelos."Second, balance sheet tightening is more likely to create conflict with the US administration given the stated objective of keeping long-end yields low," he writes.In Japan, rising yields have become increasingly political and in the US, it would quickly become a problem as borrowing costs are already near cycle highs.Overall, DB doesn't think that it's coming or that it would be an effective tool in combatting inflation. :Still, if the Fed decided to shift focus on the balance sheet as opposed to raising rates, we would view it as a decidedly bearish USD development," Saravelos writes. This article was written by Adam Button at investinglive.com.