The US Dollar Index (DXY) fell on Friday, slipping below 97.75 after the Supreme Court struck down President Trump’s IEEPA tariffs in a 6–3 decision. This drop wiped out an earlier move that had pushed DXY close to 98.00. At 13:30 GMT, fourth-quarter GDP came in at 1.4% annualised versus 3.0% expected, down from 4.4% in Q3. Estimates suggested the government shutdown may have cut growth by as much as 1.5 percentage points.

Inflation Data And Fed Policy

Inflation was stronger than expected. Headline PCE was 2.9% year-on-year, and core PCE was 3.0% versus 2.9% expected, up from 2.8%. Both rose 0.4% month-on-month versus 0.3% expected. The Fed rate stood at 3.50%–3.75%. After 15:00 GMT, the Court said the IEEPA does not allow a president to impose tariffs. The ruling removed “Liberation Day” reciprocal tariffs and the 25% IEEPA-based duties on Canada, China, and Mexico. Section 232 tariffs remained in place. DXY fell about 0.25% after the decision. Penn-Wharton estimated that more than $175 billion in duties could require refunds. JPMorgan had assigned a 64% chance that the tariffs would be struck down. Raphael Bostic said he expects no rate cuts in 2026 and pointed to uncertainty after the ruling. Preliminary February PMIs also softened: manufacturing 51.2 (52.6 expected), services 52.3 (53.0), and composite 52.3 (down 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). New home sales rose 15.5% in November and fell 1.7% in December. The Supreme Court’s decision is a major development for the US dollar. It removes a source of price pressure, which could slow inflation. We believe this gives the Federal Reserve more room to consider rate cuts later this year. Markets are already responding. The CME FedWatch Tool now shows the probability of a rate cut by the September meeting rising from 35% to almost 55%. With that backdrop, we expect ongoing dollar weakness in the weeks ahead. Put options on US Dollar Index (DXY) futures for April and May expiries look like a straightforward way to express this view. Another approach is through FX pairs, such as buying EUR/USD call options or USD/JPY put options. However, mixed data from last year still adds uncertainty. For example, the strong PCE reading in December 2025 highlights that inflation risks have not disappeared. The CBOE EuroCurrency Volatility Index (EVZ) has already jumped above 15%, its biggest one-day rise since the banking turmoil in 2025. That move suggests it may also be worth considering strategies that benefit from large swings, such as long straddles, in case the market’s first reaction proves too aggressive. The next key catalysts are the upcoming CPI report and the Fed meeting in March. The main question is whether new inflation data supports the disinflation story implied by the tariff reversal. A hawkish surprise from the Fed could trigger a sharp, even if temporary, rebound in the dollar. We also need to watch for any Treasury Department update on potential refunds of more than $175 billion in collected duties. A refund of that size would act like a large fiscal injection and could be inflationary. It would directly offset the disinflationary effect from tariff removal and could quickly force a pullback in dollar bearish positions. This is a meaningful tail risk that complicates an otherwise negative outlook for the currency. Create your live VT Markets account and start trading now.

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