BlackRock: Dollar could rise another 2%-3%; UBS: Still bullish in the long term – Wall Street giants engage in heated debate, Warsh's debut.
2026-06-17 09:31:49
On Wednesday (June 17) during the Asian session, the US dollar index fluctuated narrowly, currently trading around 99.50. With the Federal Reserve's interest rate decision imminent, market attention is shifting from the foreign exchange market to what policy signals the new chairman, Warsh, will release in his debut.
This week, newly appointed Federal Reserve Chairman Warsh will chair his first monetary policy meeting, and bond investors have clearly shifted to a cautious and neutral stance.
Goldman Sachs' client survey shows a significant increase in short and neutral positions, with market optimism about interest rate cuts cooling rapidly and pricing in a December rate hike probability of around 60%.
Goldman Sachs' latest client positioning survey shows that institutional clients' short and neutral positions continue to rise, reflecting a rapid fading of investors' optimism about a Federal Reserve rate cut this year, with more pricing in a rate hike at the December meeting. The market's implied probability has now risen to about 60%. This shift is mainly influenced by strong employment data, persistent inflationary pressures, and geopolitical factors, with investors increasingly expecting the Fed to maintain higher interest rates for a longer period.
Faced with multiple uncertainties, including rising inflation due to the Iran conflict, strong employment data, and potential political pressure from Trump, investors are generally shortening the maturity of their bonds and increasing their holdings of short-term bonds, avoiding large-scale directional bets. Market focus is on how Warsh's debut will send policy signals and whether the Fed's communication style will undergo a long-term shift.
Markets widely expect the Federal Open Market Committee (FOMC) to keep the benchmark overnight lending rate unchanged at 3.50%-3.75% at the close of its two-day meeting on Wednesday, as policymakers assess whether the conflict in Iran will keep inflation high.
However, portfolio managers and strategists are now significantly more cautious than at the beginning of the year. The market had previously anticipated an easing policy from the new chairman, but with stronger-than-expected employment data and persistent inflation driven by oil prices from the Middle East war, the market is now considering a more hawkish policy path.
US interest rate futures prices indicate a 64% probability of a rate hike at the December meeting. This is a stark contrast to a month ago, when the market expected only a 24% probability of a December rate hike.
U.S. and Iranian officials said Sunday they had reached an agreement on a peace framework to end the war and reopen the Strait of Hormuz. Energy prices could fall once oil shipments resume through this crucial waterway, adding a glimmer of hope to the inflation outlook.
However, the overall outlook for the Federal Reserve is not entirely clear. When Warsh took over as chairman, there were widespread expectations that President Trump would use his influence to push FOMC members to cut interest rates. This undoubtedly added a layer of political pressure to an already uncertain policy environment and brought the Fed's independence under intense scrutiny.
Given the current geopolitical tensions and the uncertainty surrounding the Federal Reserve's policy path, the bond market is generally avoiding bold directional bets, instead adopting a more neutral duration strategy and increasing its allocation to high-quality fixed-income bonds.
Scott Thiel, global head of fixed income at Blackstone, said, "Given the many macroeconomic uncertainties, institutional investors are cautiously adjusting their positions, shifting some funds from longer maturities to the front of the yield curve to reduce volatility risk." This strategy means allocating more to short-term government bonds and investment-grade corporate bonds, seeking stable returns while maintaining liquidity.
BlackRock's latest US Treasury client survey shows that the proportion of short-duration holdings by active institutional clients has risen to 35%, a further increase from the previous week. Meanwhile, among the overall client base, the proportion maintaining a neutral US Treasury position has risen for three consecutive weeks to 57%, reflecting the market's highly cautious attitude towards interest rate volatility. The bank's fixed income team believes that in the current environment, a defensive allocation is better than aggressive betting.
Michael Cantara, Global Head of Fixed Income Strategy at UBS, noted, "Unknown geopolitical and policy risks do not support a significant concentration of duration exposure. The Fed faces multiple challenges, and we advise clients to moderately increase their holdings of high-quality short-term bonds while maintaining a neutral overall duration to cushion against potential market volatility." He emphasized that the committee needs to proceed cautiously with reforms to avoid triggering significant upheaval in the early stages of its term.
Several fund managers said that although there may still be some time before the actual rate hike, investors expect the Federal Reserve to release a signal of a neutral policy stance through a statement before starting the rate hike cycle.
Even so, some market participants still expect the Federal Reserve to cut interest rates next year. George Catrambone, head of fixed income for the Americas at DWS, pointed out: "There are multiple concerns about economic growth in the second half of this year, and given the current situation of the war in Iran, we believe that the outlook for inflation and economic growth has not improved significantly."
These concerns are also influencing market expectations regarding the Federal Reserve's policy communication style. Warsh has previously stated his dislike for forward guidance and advocated for reducing communication about policy intentions. Some investors believe that the Fed's communication tools may undergo a long-term shift, such as reducing the frequency of forward guidance and weakening the role of the "dot plot" of interest rate forecasts—although there are doubts about whether a major shift will occur this week.
Janus Henderson Investor's Siluk said, "Wash risks causing unnecessary market volatility if he is too direct and explicit in stating his plans after only one meeting with his colleagues."
Goldman Sachs and JPMorgan strategists point out that with Warsh's debut delivering a hawkish signal, the dollar index may test the 100 level around this week's meeting. If the FOMC statement hints at maintaining restrictive interest rates for a longer period or remains vigilant about inflation risks from the Iranian conflict, the dollar will further attract safe-haven inflows, especially given the continued global geopolitical uncertainty.
BlackRock analysts believe that strong employment data and potential volatility in oil prices will support the US dollar, with the dollar index expected to appreciate by 2%-3% from current levels in the short term. Conversely, if Warsh demonstrates more flexibility in his communications, or if a rapid implementation of the Iran deal leads to a significant drop in oil prices, the dollar's upward momentum may slow down in the short term.
However, UBS believes that even with expectations of moderate interest rate cuts, the US dollar will still benefit from the resilience of the US economy and the relatively high interest rate environment, and will remain strong in the long term.
Overall, the US dollar index will be one of the most important market indicators following this week's Federal Reserve meeting, directly impacting global capital flows and the performance of emerging market assets. Investors should pay close attention to Warsh's press conference remarks to gauge the extent of subsequent dollar volatility.
At 9:28 AM Beijing time on June 17, the US dollar index was at 99.50.
This week, newly appointed Federal Reserve Chairman Warsh will chair his first monetary policy meeting, and bond investors have clearly shifted to a cautious and neutral stance.
Goldman Sachs' client survey shows a significant increase in short and neutral positions, with market optimism about interest rate cuts cooling rapidly and pricing in a December rate hike probability of around 60%.
Goldman Sachs' latest client positioning survey shows that institutional clients' short and neutral positions continue to rise, reflecting a rapid fading of investors' optimism about a Federal Reserve rate cut this year, with more pricing in a rate hike at the December meeting. The market's implied probability has now risen to about 60%. This shift is mainly influenced by strong employment data, persistent inflationary pressures, and geopolitical factors, with investors increasingly expecting the Fed to maintain higher interest rates for a longer period.
Faced with multiple uncertainties, including rising inflation due to the Iran conflict, strong employment data, and potential political pressure from Trump, investors are generally shortening the maturity of their bonds and increasing their holdings of short-term bonds, avoiding large-scale directional bets. Market focus is on how Warsh's debut will send policy signals and whether the Fed's communication style will undergo a long-term shift.
Market expectations shifted dramatically: from betting on rate cuts to pricing in rate hikes.
Markets widely expect the Federal Open Market Committee (FOMC) to keep the benchmark overnight lending rate unchanged at 3.50%-3.75% at the close of its two-day meeting on Wednesday, as policymakers assess whether the conflict in Iran will keep inflation high.
However, portfolio managers and strategists are now significantly more cautious than at the beginning of the year. The market had previously anticipated an easing policy from the new chairman, but with stronger-than-expected employment data and persistent inflation driven by oil prices from the Middle East war, the market is now considering a more hawkish policy path.
US interest rate futures prices indicate a 64% probability of a rate hike at the December meeting. This is a stark contrast to a month ago, when the market expected only a 24% probability of a December rate hike.
The Iran deal has led to expectations of lower oil prices, but the inflation outlook remains uncertain.
U.S. and Iranian officials said Sunday they had reached an agreement on a peace framework to end the war and reopen the Strait of Hormuz. Energy prices could fall once oil shipments resume through this crucial waterway, adding a glimmer of hope to the inflation outlook.
However, the overall outlook for the Federal Reserve is not entirely clear. When Warsh took over as chairman, there were widespread expectations that President Trump would use his influence to push FOMC members to cut interest rates. This undoubtedly added a layer of political pressure to an already uncertain policy environment and brought the Fed's independence under intense scrutiny.
Bond investors shift towards neutral duration and short-term defensive strategies
Given the current geopolitical tensions and the uncertainty surrounding the Federal Reserve's policy path, the bond market is generally avoiding bold directional bets, instead adopting a more neutral duration strategy and increasing its allocation to high-quality fixed-income bonds.
Scott Thiel, global head of fixed income at Blackstone, said, "Given the many macroeconomic uncertainties, institutional investors are cautiously adjusting their positions, shifting some funds from longer maturities to the front of the yield curve to reduce volatility risk." This strategy means allocating more to short-term government bonds and investment-grade corporate bonds, seeking stable returns while maintaining liquidity.
BlackRock's latest US Treasury client survey shows that the proportion of short-duration holdings by active institutional clients has risen to 35%, a further increase from the previous week. Meanwhile, among the overall client base, the proportion maintaining a neutral US Treasury position has risen for three consecutive weeks to 57%, reflecting the market's highly cautious attitude towards interest rate volatility. The bank's fixed income team believes that in the current environment, a defensive allocation is better than aggressive betting.
Michael Cantara, Global Head of Fixed Income Strategy at UBS, noted, "Unknown geopolitical and policy risks do not support a significant concentration of duration exposure. The Fed faces multiple challenges, and we advise clients to moderately increase their holdings of high-quality short-term bonds while maintaining a neutral overall duration to cushion against potential market volatility." He emphasized that the committee needs to proceed cautiously with reforms to avoid triggering significant upheaval in the early stages of its term.
The Federal Reserve's communication style may be changing, but its first meeting is expected to be primarily stable.
Several fund managers said that although there may still be some time before the actual rate hike, investors expect the Federal Reserve to release a signal of a neutral policy stance through a statement before starting the rate hike cycle.
Even so, some market participants still expect the Federal Reserve to cut interest rates next year. George Catrambone, head of fixed income for the Americas at DWS, pointed out: "There are multiple concerns about economic growth in the second half of this year, and given the current situation of the war in Iran, we believe that the outlook for inflation and economic growth has not improved significantly."
These concerns are also influencing market expectations regarding the Federal Reserve's policy communication style. Warsh has previously stated his dislike for forward guidance and advocated for reducing communication about policy intentions. Some investors believe that the Fed's communication tools may undergo a long-term shift, such as reducing the frequency of forward guidance and weakening the role of the "dot plot" of interest rate forecasts—although there are doubts about whether a major shift will occur this week.
Janus Henderson Investor's Siluk said, "Wash risks causing unnecessary market volatility if he is too direct and explicit in stating his plans after only one meeting with his colleagues."
Institutional Views
Goldman Sachs and JPMorgan strategists point out that with Warsh's debut delivering a hawkish signal, the dollar index may test the 100 level around this week's meeting. If the FOMC statement hints at maintaining restrictive interest rates for a longer period or remains vigilant about inflation risks from the Iranian conflict, the dollar will further attract safe-haven inflows, especially given the continued global geopolitical uncertainty.
BlackRock analysts believe that strong employment data and potential volatility in oil prices will support the US dollar, with the dollar index expected to appreciate by 2%-3% from current levels in the short term. Conversely, if Warsh demonstrates more flexibility in his communications, or if a rapid implementation of the Iran deal leads to a significant drop in oil prices, the dollar's upward momentum may slow down in the short term.
However, UBS believes that even with expectations of moderate interest rate cuts, the US dollar will still benefit from the resilience of the US economy and the relatively high interest rate environment, and will remain strong in the long term.
Overall, the US dollar index will be one of the most important market indicators following this week's Federal Reserve meeting, directly impacting global capital flows and the performance of emerging market assets. Investors should pay close attention to Warsh's press conference remarks to gauge the extent of subsequent dollar volatility.
At 9:28 AM Beijing time on June 17, the US dollar index was at 99.50.
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