CICC: USD May Return to Weak Range After Rate Hike Expectations Peak
Alina Collins
CICC argues the Fed is 'hawkish in name, dovish in practice' this year — once rate-hike pricing peaks without an actual hike, the dollar index likely falls back to its prior weak range and risk-asset rotations reverse.
Why did markets suddenly correct in June?
The dollar index broke above its one-year trading range; rising rate-hike expectations are the core driver.
AI-momentum indices pulled back broadly; within U.S. equities, defensive sectors took the lead.
This means → the sell-off is not a fundamental deterioration — it is tightening dollar liquidity repricing risk assets.
How did liquidity flip from loose to tight?
From December to May, the Fed's balance-sheet expansion lifted reserves from a trough of ~$2.9 trillion, easing funding stress.
From late April the expansion pace dropped from $40 billion/month to $10 billion/month — the tap slowed sharply.
Meanwhile, Treasury financing is draining liquidity: outstanding U.S. debt topped $39 trillion in May; the Treasury keeps raising its general-account target.
In plain terms = one pipe is filling slower while another pipe drains faster — June funding pressure was inevitable.
Why does CICC rule out an actual rate hike this year?
The bottom half of the K-shaped economy (a recovery that benefits high earners while lower-income segments stay in recession) remains weak: May wage growth fell to 3.5%; real wages declined.
Consumer loans, auto loans, and small-business financing rates are all pegged to the policy rate — a hike would hit these sectors first.
The Atlanta Fed has cut its Q2 real annualized GDP estimate to 1.2%; the WEI index has dropped sharply since June.
This means → actual economic strength is far below market expectations — fundamentals cannot absorb a rate hike.
Is inflation expectation actually falling?
U.S.–Iran negotiations advance → oil prices decline → inflation expectations have begun to fall.
New Fed Chair Kevin Warsh acknowledged this in his July 1 speech.
This reflects a rising internal tolerance for inflation; the hawkish posture is more an authority-establishing gesture to rebuild Fed independence.
Where do the dollar and market style go from here?
Near term: until inflation data drops materially, hike expectations may keep building — dollar stays firm, markets stay under pressure.
Inflection point: once hike expectations peak without an actual hike, the dollar index returns to its weak range.
CICC remains bullish on real assets, upstream sectors, and tech outperforming broadly — themes of "resource self-sufficiency" and "productivity uplift."
In plain terms = CICC's core call is "bark loud, don't bite" — the Fed talks hikes but never pulls the trigger, and the market ultimately trades de facto easing.
Content is for reference only, not financial advice.