The US Dollar Index (DXY) fell on Friday, dropping below 97.75 after the Supreme Court struck down President Trump’s IEEPA tariffs in a 6-3 ruling. The move reversed an earlier rise that had taken DXY towards 98.00.
At 13:30 GMT, fourth-quarter GDP was 1.4% annualised versus 3.0% expected, down from 4.4% in Q3. Estimates said the government shutdown cut growth by up to 1.5 percentage points.
Inflation Data And Fed Policy
Inflation data were firmer than forecast, with PCE at 2.9% year-on-year and core PCE at 3.0% versus 2.9% expected, up from 2.8%. Both rose 0.4% month-on-month versus 0.3% expected, while the Fed rate was 3.50%–3.75%.
After 15:00 GMT, the Court said IEEPA does not allow a president to impose tariffs. The ruling removed “Liberation Day” reciprocal tariffs and 25% IEEPA-based duties on Canada, China, and Mexico, while Section 232 tariffs stayed.
DXY dropped about a quarter of a percent after the decision, and Penn-Wharton estimated over $175 billion in duties might need refunds. JPMorgan had put a 64% probability on the tariffs being struck down.
Raphael Bostic said he expects no rate cuts in 2026 and noted uncertainty after the ruling. Preliminary February PMIs softened: manufacturing 51.2 (52.6 expected), services 52.3 (53.0), composite 52.3 (from 53.0).
Positioning And Risks Ahead
University of Michigan sentiment for February was 56.6 versus 57.3 expected. Inflation expectations eased to 3.4% (1-year) and 3.3% (5-year), while new home sales rose 15.5% in November and fell 1.7% in December.
The Supreme Court’s decision to strike down the IEEPA tariffs is a significant event that reshapes the landscape for the US dollar. This ruling introduces a powerful disinflationary force into the economy, which we see as giving the Federal Reserve more justification to consider rate cuts later this year. The market is already reacting, with the CME FedWatch Tool now showing the probability of a rate cut by the September meeting jumping from 35% to nearly 55%.
Given this outlook, we should position for continued dollar weakness in the coming weeks. Put options on the US Dollar Index (DXY) futures for April and May expiry look attractive as a direct way to play this trend. Alternatively, we can express this view through other currency pairs, such as buying call options on the EUR/USD or put options on the USD/JPY.
However, the conflicting economic data from last year, such as the hot PCE we saw in December 2025, creates underlying tension and uncertainty. The CBOE’s EuroCurrency Volatility Index (EVZ) has already spiked over 15%, its largest single-day jump since the banking turmoil we saw back in 2025. This suggests we should also consider strategies that benefit from sharp price swings, such as long straddles, in case the market’s initial reaction is too aggressive.
The key events to watch will be the next Consumer Price Index (CPI) report and the Fed’s upcoming meeting in March. We need to see if incoming inflation data confirms the disinflationary narrative that the tariff removal suggests. Any hawkish surprise from the Fed could cause a violent, albeit temporary, reversal of the dollar’s recent slide.
Finally, we must monitor any announcements from the Treasury Department regarding the potential refund of over $175 billion in collected duties. Such a massive fiscal injection would be highly inflationary, directly countering the disinflationary effect of the tariffs’ removal and could quickly unwind dollar shorts. This remains a significant tail risk that complicates the otherwise bearish outlook for the currency.
