Published on: 2026-02-24
Tariffs may initially strengthen the US dollar; however, second-order effects often determine the longer-term trend. Risk-off flows and persistent expectations of higher interest rates can support the USD, while weaker growth, retaliatory measures, and diminished policy credibility may ultimately reverse these gains.
The 2026 tariff shock is characterized by significant uncertainty in addition to changes in tax rates. The legal and political trajectory is critical, as markets assess the durability of tariffs rather than focusing solely on headline figures.
The Federal Reserve's policy response is more influential than tariff headlines. If tariffs contribute to persistent inflation and keep real yields elevated, the USD typically appreciates. Conversely, if tariffs appear stagflationary and reduce real yields, the USD may depreciate.
Global spillover effects are significant. The rise of protectionism across regions alters relative growth expectations, disrupts supply chains, and redirects capital flows. These dynamics can either reinforce USD strength or prompt diversification away from the dollar.
| Item | What Changed | Date / Window | Effect on USD |
|---|---|---|---|
| US Supreme Court Limits Emergency Tariff Authority | Court struck down tariffs imposed under IEEPA | Feb 20, 2026 | Reduced expected “tariff inflation” pushed USD lower on the day, as rate expectations repriced |
| Section 122 Global Tariff Surcharge | New temporary, broad import surcharge authority | Up to 150 days | Time-limited design raises “cliff risk,” increasing FX volatility around extension or replacement |
| Recent USD Market Print Around The Ruling | DXY about 97.80, EUR about $1.1779 (intraday) | Feb 20, 2026 | Shows the market treated the ruling as dovish at the margin |
| US Metals Tariffs Reset Under Section 232 | 25% tariff on steel imports (and related actions) | Feb 2025 proclamation | Reinforces that tariffs can persist via other statutes even if one pathway is blocked |
| EU Steel Safeguard Replacement Moves Forward | Quotas reduced, out-of-quota duty up to 50% | Safeguards expire Jun 30, 2026 | Non-US protectionism matters for relative growth and EUR, indirectly shaping USD |
| WTO Finds Tariffs Rising Sharply | Import coverage of new tariffs jumped more than fourfold | Oct 2024 to Oct 2025 | Confirms a broader protectionist regime, not a one-off episode |
Tariffs function as a tax on cross-border trade. In foreign exchange markets, their impact is transmitted through three primary channels: relative growth, relative interest rates, and risk sentiment. While reduced import demand may theoretically narrow the trade deficit and support the currency, in practice, tariffs often increase input costs, disrupt supply chains, and provoke retaliatory measures, thereby undermining growth and deteriorating the investment climate.
Currency markets typically assess whether tariffs enhance a country's real yield advantage and perceived safety or instead generate stagflation and political risk. In 2026, the latter consideration is particularly salient, as tariff policy coincides with legal uncertainty regarding the longevity and authority of new measures.
The current wave of tariffs is characterized not only by increased tariff rates but also by the introduction of additional mechanisms, heightened legal contestability, and greater policy volatility. Following the Supreme Court's removal of one set of tariffs, policymakers quickly shifted to alternative statutory tools and implemented a temporary surcharge framework, maintaining elevated headline risk for importers, corporations, and investors.
Simultaneously, protectionist measures are expanding beyond the United States. The European Union is implementing a new steel regime to replace expiring safeguards on June 30, 2026, featuring stricter quotas and increased out-of-quota duties, explicitly addressing global overcapacity. This development is significant because a more defensive European stance alters growth and interest rate expectations for the euro area, and the euro constitutes the largest component in most USD index calculations.
On a global scale, the World Trade Organization's trade monitoring has identified a substantial increase in the proportion of global imports subject to new tariffs and import measures in the most recent reporting period. This shift signals a regime change, as foreign exchange markets respond differently to persistent trends compared to isolated shocks.
In the immediate aftermath of tariff announcements, investors frequently seek safe, liquid assets, which historically benefits the US dollar. However, market reactions in February following a legal ruling demonstrated the opposite effect: when tariffs are removed or perceived as less durable, markets may interpret this as reduced inflationary pressure and a diminished need for restrictive monetary policy, thereby weakening USD yield support.
This dynamic illustrates why the assumption that tariffs invariably strengthen the dollar is overly simplistic. A tariff announcement may support the USD if it increases the US interest rate advantage, but it can also weaken the currency if it signals slower growth, undermines confidence, compresses real yields, or accelerates diversification into alternative assets such as gold or other safe havens.
Fed officials have been explicit that tariffs can produce a one-time level shift in prices, but the key question is whether they spill into inflation persistence and expectations. Governor Waller laid out scenario thinking that links tariff size to inflation outcomes and labor market trade-offs, emphasizing uncertainty about where policy settles.
If tariffs contribute to persistent core inflation, markets are likely to anticipate fewer interest rate cuts or a higher terminal rate, thereby supporting the USD through rate differentials. Conversely, if tariffs are perceived as causing stagflation by weakening demand faster than inflation rises, real yields may decline, and the dollar may depreciate.
Foreign exchange markets operate on relative performance. Tariffs may support the USD if they disproportionately harm foreign exporters compared to the US economy, particularly in regions highly sensitive to trade. However, research by the Bank for International Settlements indicates that tariffs can broadly reduce output growth, with the impact determined by trade linkages and retaliatory actions.
The US dollar generally appreciates when the United States is perceived as relatively resilient compared to other economies, but weakens if tariffs negatively affect US economic activity, profit margins, and business confidence. Consequently, markets closely monitor high-frequency indicators and corporate guidance for signs of supply chain disruptions and reductions in capital expenditures.
The US dollar derives structural support from deep financial markets, widespread reserve usage, and the perception of US assets as premier collateral. However, significant and abrupt policy changes can erode this premium. For instance, refunds and litigation related to previously collected tariffs introduce fiscal and legal uncertainty into the outlook.
Although this channel operates gradually, it remains significant. Should global investors require a higher risk premium to hold US assets, the dollar may underperform even during periods of risk aversion, as capital flows are directed toward alternative assets.
Stronger Dollar Scenario: Tariffs demonstrate durability, retaliatory actions are limited, and inflation remains sufficiently elevated to prompt caution from the Federal Reserve. Under these conditions, US real yields are supported, and the USD benefits from both interest rate differentials and safe-haven demand.
Weaker Dollar Scenario: Tariffs appear unstable or subject to political constraints, economic growth decelerates, and markets anticipate a more accommodative Federal Reserve policy. In this environment, the 'sell America' narrative becomes more prominent, and diversification flows become increasingly evident in asset allocation.
Range-Bound Scenario: Tariffs increase market volatility without fundamentally altering the long-term outlook. Policy fluctuations generate short-term movements, but relative growth and interest rate differentials remain largely unchanged. As a result, the dollar trades within a broad range, particularly against other major safe-haven currencies.
The most informative indicators remain real yields, inflation expectations, and the growth surprise cycle. If markets interpret tariffs as inflationary and persistent, real yields typically rise and the USD appreciates. Conversely, if tariffs are viewed as an uncertainty shock that restrains investment and prompts the Federal Reserve to ease policy, the USD tends to weaken.
It is also important to monitor the timing risks embedded in legislation. Section 122 is intended as a temporary measure, and any extension beyond the initial period requires Congressional approval. This creates a specific window during which 'cliff risk' may influence foreign exchange pricing.
No. Tariffs can support USD if they increase the US rate advantage or trigger classic risk-off flows. They can weaken the USD if they signal stagflation, compress real yields, or erode confidence in policy stability. The sign depends on growth and Fed pricing.
The market treated the ruling as reducing tariff-related inflationary pressure and, therefore, lowering the need for restrictive policy at the margin. Reported pricing showed the dollar index slipping in volatile trade around the decision, alongside shifting rate expectations.
Section 122 (19 U.S.C. § 2132) is a balance-of-payments authority that allows a temporary import surcharge. Its built-in time limit makes tariff policy more “event-driven,” because FX must price extension risk, legal durability, and potential substitution into other tariff statutes.
They change relative growth and rate expectations. For example, tighter EU steel protections can influence euro area inflation and industrial activity, thereby affecting EUR and, by extension, broad USD indices. When protectionism becomes global, FX often rotates based on which region absorbs the larger growth hit.
Start with US core inflation, real yields, and labor market cooling. Then track trade volumes, import prices, and business confidence for signs of supply chain disruption. Policy milestones also matter, especially changes to the expected duration or scope of tariffs.
The introduction of new global tariffs is expected to initially increase US dollar volatility, followed by a more defined trend as markets determine whether tariffs result in higher real yields and relative US resilience (USD-positive) or lead to stagflation, retaliation, and diminished credibility (USD-negative). In 2026, the trajectory of the dollar will depend less on headline tariff rates and more on the durability of measures, Federal Reserve policy, and the continued willingness of global investors to grant the US a safe-haven premium.
Disclaimer: This material is for general information purposes only and is not intended as financial or investment advice.
