Can the Dollar Stay Strong Amid Tariff Turbulence? Navigating Currency Risks and Equity Opportunities

The U.S. dollar has been a bastion of stability in recent months, but its resilience faces a critical test as tariff disputes with Japan and the EU escalate. With courts halting tariffs, renegotiating trade terms, and inflation trends shifting, the USD's path against the yen and euro hinges on how these policy battles unfold. For investors, this is a moment to reassess risk in forex markets and spot opportunities in equities. Here's how to position for what's ahead.

The Tariff Tightrope: USD/JPY Under Pressure

The U.S. and Japan's tariff standoff has been a rollercoaster. After the U.S. delayed 24% tariffs on Japanese goods until July 2025, a court injunction on May 28th threw everything into legal limbo. This uncertainty is already biting into Japan's economy: exports to the U.S. fell 1.8% year-on-year in April, with auto shipments down 4.8%. While the yen has rallied 1.6% against the dollar since March, the Bank of Japan's (BOJ) delayed rate hikes—now pushed to October 2025—keep downward pressure on USD/JPY.

Investors in automakers like Toyota are watching this closely. A weaker yen improves their U.S. earnings, but prolonged tariff uncertainty could stall production and sales. For forex traders, the yen's technical support at 144.00 (as of May) is critical—break below it, and USD/JPY could climb to 150 by year-end.

EUR/USD: Legal Battles and Inflation Risks

The EU isn't off the hook either. The U.S. threatened tariffs of 20%–200% on EU goods, but a May court ruling deemed them illegal under emergency powers. The tariffs remain suspended pending appeal, leaving EUR/USD hovering near $1.14. However, the EU's retaliatory plans—targeting $95 billion in U.S. exports—add fuel to the fire.

The Fed's dilemma is clear: inflation is cooling (2.3% in March), but wage growth (3.8% year-on-year) and supply chain disruptions keep risks elevated. A “wait-and-see” stance on rates keeps the dollar buoyant, but if the Fed cuts rates in late 2025, EUR/USD could rebound to $1.18.

Equity Markets: Sector Winners and Losers

The tariff wars are reshaping equity landscapes. Winners include:
- Defensive stocks: Utilities (e.g., NextEra Energy) and healthcare (e.g., Johnson & Johnson) thrive in uncertain environments.
- Exporters with hedged exposure: Companies like Boeing (BA), which can pivot production to avoid tariffs, or European firms with dollar-denominated earnings.

Losers face headwinds:
- Auto manufacturers: Toyota and Daimler (DAI) are vulnerable to both tariffs and currency swings.
- Commodity-linked equities: Higher tariffs on metals (steel, aluminum) could squeeze margins for companies like ArcelorMittal (MT).

Equity investors should focus on firms with pricing power or diversified supply chains. The May jobs report, showing slowing wage growth, eases inflation fears—but don't count on it.

Actionable Strategies for Now

1. Forex:
2. Short the yen (USD/JPY): Target 148 by Q4 if tariffs resurface.

3. Long the euro (EUR/USD): Wait for a Fed rate cut signal before buying dips below $1.12.

4. Equities:

5. Buy defensive sectors: Utilities and healthcare ETFs (XLU, VHT) offer stability.

6. Avoid tariff-exposed industries: Autos and industrials (XLI) face margin pressure.

7. Hedging:

8. Use options to protect against USD volatility—e.g., put options on USD/JPY if you're long yen-denominated assets.

The Bottom Line

The dollar's strength isn't guaranteed. While tariffs remain suspended, the Fed's patience and corporate resilience could prolong USD gains. But if courts greenlight tariffs or inflation rebounds, the yen and euro could stage a comeback. Investors must stay nimble: favor hedged equity strategies and monitor central bank signals closely. The next few months will decide whether this is a dollar bull market or a last gasp before the next leg of volatility.

Final call: Position for USD strength but hedge against a policy surprise. The stakes are global, and the clock is ticking.