The U.S. Consumer: Resilient Amid Tariff Uncertainty—But What Does This Mean for the Dollar?

The U.S. consumer has long been the backbone of the American economy, and 2025 is no exception. Despite a surge in trade policy uncertainty—marked by tariffs averaging 15.8% as of August 2025—consumer spending rebounded in Q2, contributing to a 3.0% GDP growth. This resilience, however, is not without cracks. The interplay between consumer behavior, trade policy, and Federal Reserve decisions is creating a complex landscape for the U.S. dollar (USD) and global asset allocations.

Consumer Resilience: A Double-Edged Sword

U.S. consumer spending accounts for two-thirds of GDP, and its rebound in Q2 2025 was driven by a 1.4% increase in both goods and services. Durable goods, particularly motor vehicles, surged 16.3% as buyers rushed to avoid anticipated tariff hikes. Meanwhile, services spending rose 1.1%, with health care and food services leading the charge. Retailers like Walmart, leveraging omnichannel strategies and AI-driven inventory management, saw a 4.5% comp sales growth, outpacing traditional models like Target.

Yet, this resilience is increasingly fragile. The University of Michigan Consumer Sentiment Index dropped to 58.6 in August 2025, a four-month low, as inflation expectations rose to 4.9% for the next year. Consumers are shifting toward essentials and delaying discretionary purchases, with 50% of households planning to hold off on electronics and dining out. This "essentialism" is a survival tactic, not a sign of robust confidence.

Trade Policy: Tariffs as a Sword and Shield

The Trump administration's aggressive tariff strategy—35% on Canadian goods, 30% on South African, and 20% on Vietnamese—has created a paradox. While these tariffs aim to protect domestic industries, they also risk inflating U.S. PCE prices by 1–1.5% in 2025. J.P. Morgan estimates that a 10% universal tariff and 110% on China could reduce global GDP by 1%, exacerbating inflationary pressures.

However, tariffs have also reinforced the USD's role as a global reserve currency. Central banks continue to rely on U.S. Treasuries and the Fed's swap lines for liquidity, even as trade barriers fragment supply chains. The U.S.-Japan trade deal, which reduced tariffs on Japanese goods to 15%, has bolstered the yen and Japanese equities, but the dollar's dominance remains unchallenged.

Federal Reserve: Walking a Tightrope

The Fed's 4.25–4.50% federal funds rate reflects a cautious balancing act. With core PCE inflation at 2.5% and unemployment at 4.1%, the Fed resists pressure for rate cuts, fearing that one-time tariff-driven price spikes could become entrenched. J.P. Morgan forecasts the first rate cut in September 2025, contingent on a U.S. recession risk rising to 30%.

This data-dependent approach has kept the USD in a neutral stance. While a strong labor market supports the dollar, weak consumer sentiment and inflation concerns temper its strength. The Fed's reluctance to act preemptively has left investors hedging against stagflation risks, with Treasuries and gold gaining traction.

USD Dynamics: A Tale of Two Forces

The dollar's strength hinges on the tension between consumer resilience and trade policy risks. A robust labor market and steady wage growth (3.7% YoY) underpin the USD, but rising tariffs and inflation expectations create headwinds. The dollar's role as a safe-haven asset is intact, yet its real value is eroded by the very policies meant to protect it.

Cross-Asset Allocations: Defensive Posturing

Investors are recalibrating portfolios to navigate this uncertainty. Defensive sectors like utilities, healthcare, and consumer staples are favored, while cyclical industries (automotive, industrials) face margin pressures. The S&P 500 is expected to trade between 5,200 and 5,800, with volatility likely as trade tensions evolve.

Emerging markets face a double whammy: higher tariffs on exports and weaker dollar returns. China's 84% retaliatory tariff on U.S. goods has already dented its growth outlook, while Brazil's potential export decline adds to the risk. Currency hedging and short-duration bonds are becoming essential tools for global portfolios.

Investment Advice: Navigating the Crossroads

For investors, the key is to balance resilience and risk. Here's how:
1. Defensive Equity Exposure: Overweight sectors with low trade sensitivity (e.g., healthcare, utilities) and high-quality, low-volatility stocks.
2. Hedge Inflation and Currency Risk: Allocate to Treasuries, gold, and short-duration bonds. Consider hedging emerging market exposure.
3. Monitor Fed Policy: A September rate cut could trigger a dollar sell-off. Position for range-bound equity markets and a potential shift in USD dynamics.
4. Tariff-Resilient Sectors: Invest in companies with strong pricing power and domestic supply chains (e.g., Walmart, pharmaceuticals).

The U.S. consumer remains a formidable force, but its strength is increasingly a product of necessity, not optimism. As tariffs and inflation reshape the economic landscape, the dollar's fate—and with it, global asset allocations—will depend on how well policymakers and investors navigate this fragile equilibrium.