As Trump’s tariff regime goes on trial, Macquarie says all eyes on USD

Investing.com -- The dollar’s status is again front and center as the Supreme Court prepares to review whether President Trump’s use of emergency powers to carry out his tariff regime are justified or not that could have far-reaching implications for the dollar and the path of U.S. rates, Macquarie said.

"Removing some or all of the IEEPA tariffs would swing the outlook back toward measured disinflation and lower inflation expectations. The Fed could then revert back toward putting less emphasis on inflation, thus justifying further rate cuts,” Macquarie’s economists said in a recent note, ahead of oral arguments before the Supreme Court set to begin on Wednesday. 

A ruling against the tariffs would likely hit the dollar, with “USD weakness and higher long-term UST yields, at least at first,” the economists said, Without the impact of tariffs, the evidence that inflation is closing in on the Fed’s 2% target would be substantial, the economists said, noting that CPI would have been around 2.2% in September if there had been no new tariffs this year rather than the reported 2.9%. 

The outcome on whether Trump’s use of the IEEPA to launch his tariff regime is legal or not hinges on two competing arguments: Those that challenge the president’s use of IEPPA believe that it doesn’t grant tariff authority and trade deficits aren’t emergencies, as they these imbalances have persisted for many years. Trump’s side counters, however, that only the president can declare a national emergency and points to the diplomatic and security leverage of tariffs.

The Supreme Court, however, might side with the Trump administration if the tariffs are seen as addressing national security, or it could be swayed by the “major questions doctrine” requiring explicit Congressional authority, Macquarie added.

But Trump’s own statements could come back to haunt his tariff regime, Macquarie warns, pointing to instances in which the president has admitted tariffs were sometimes imposed for reasons other than urgent economic need. Earlier this year, Trump ordered a huge hike on tariffs for Brazil exports to the U.S., partly for what the U.S. president called the “witch-hunt” against former Brazilian President Jair Bolsonaro.

"The Order finds that the Government of Brazil’s politically motivated persecution, intimidation, harassment, censorship, and prosecution of former Brazilian President Jair Bolsonaro and thousands of his supporters are serious human rights abuses that have undermined the rule of law in Brazil," the White House said in a Jul. 30 statement after implementing additional tariffs on Brazil. 

If the IEEPA tariffs are deemed illegal, then it would raise serious questions about the United States’ ballooning deficit and hurt the economy as Macquarie estimates that tariff revenue could raise up to $2 trillion for the government budget over a decade, with removal adding “2-3% of GDP” to the debt ratio.

The Supreme Court may, however, opt for a middle ground that restricts some emergency powers "without fully dismantling Trump’s aability to use tariffs flexibly," Macquarie said.

The nuance of any decision would likely be as important for the trajectory of the dollar as the ruling itself, Macquarie added.

Adding to the volatility of uncertainty, Macquarie notes that the legal battle against Trump’s tariff regime could "be handed down any time between late November and some time in Q1 2026."