The US Dollar's Volatility Amid Tariff Litigation: Navigating Judicial Constraints and Geopolitical Risks

The US Court of International Trade's April 2025 ruling that President Trump's “Liberation Day” tariffs exceeded executive authority under the International Emergency Economic Powers Act (IEEPA) has reignited debates over the separation of powers—and with it, profound implications for the US dollar. While the immediate suspension of these tariffs alleviated trade war fears, prolonged legal battles threaten to rekindle uncertainty. Investors must now parse the interplay between judicial constraints, market psychology, and geopolitical tail risks to position portfolios for this volatile landscape.

Judicial Constraints and the Dollar's Immediate Rally

The court's decision to block tariffs as ultra vires—a violation of statutory authority—sent a clear message: Congress, not the executive, holds the constitutional power to set tariffs. Markets reacted swiftly, with the US Dollar Index (DXY) rising 1.2% in the immediate aftermath, as investors priced in reduced trade war risks. The removal of 50% “reciprocal” duties and 145% China-specific tariffs lifted equities and commodity prices, easing supply chain bottlenecks.

Yet this relief was short-lived. An appellate court's emergency stay reinstating the tariffs in late May underscored the fragility of this reprieve. The dollar's subsequent dip against safe-haven currencies like the yen and Swiss franc reflects investor wariness: The “headline-weary” market now awaits the Supreme Court's potential intervention, with traders adopting a “wait-and-see” stance.

The Economic Backdrop: Growth, Inflation, and Policy Uncertainty

The tariffs' initial implementation had already inflicted tangible damage. The Q1 2025 GDP contraction of 0.3%—driven by inventory distortions and supply chain disruptions—highlighted the fragility of a post-pandemic economy. Yale's Budget Lab warns that sustained tariffs could slash 2025 GDP growth by 0.9%, a loss of $180 billion annually.

Inflation, too, bore the brunt of protectionism. Apparel prices surged 17%, while food costs rose 2.6%—a 5.4% spike in fresh produce alone. These trends underscore the Fed's dilemma: a strong dollar eases import-driven inflation, but prolonged tariff uncertainty could reignite price pressures through supply chain volatility.

Legal Uncertainty and Its Ripple Effects

The court's ruling has not ended the battle but reshaped it. The White House is now constrained to alternative legal frameworks, such as Section 232 (national security tariffs) or Section 301 (unfair trade practices). However, these pathways face their own hurdles. Section 232 tariffs on steel and aluminum require Commerce Department findings of national security risks—a process that could delay swift action. Meanwhile, Section 301's China-specific focus limits its applicability to broader trade disputes.

This narrowing of options has geopolitical consequences. Trading partners like Canada and the EU, which had complied with earlier tariff threats, now demand clearer policy signals. Without them, supply chains may fragment further, with businesses accelerating diversification into non-US markets.

Investment Implications: Bullish Short-Term, Prudent Hedging

For traders, the near-term outlook favors dollar bullishness. The suspension of IEEPA tariffs has reduced the risk of a “trade war 2.0,” allowing the dollar to reclaim its status as a safe haven. A tactical long position in the DXY—targeting a rebound to pre-tariff levels (around 103)—could yield gains, particularly if the Supreme Court ultimately upholds the lower court's ruling.

Yet this optimism must be tempered. The “pinball machine” of legal reversals—exemplified by the appellate stay—suggests prolonged volatility. Investors should pair dollar exposure with hedging tools:
- Currency Options: Protective puts on the dollar against sudden dips due to adverse court rulings.
- Diversification: Allocate to safe-haven assets like gold or the yen for downside protection.
- Sector Rotations: Rotate into dollar-denominated commodities (e.g., energy stocks) that benefit from dollar strength while hedging against inflation.

Conclusion: Balancing Opportunity and Risk

The US dollar's volatility reflects a pivotal moment in the interplay between law, economics, and geopolitics. While judicial constraints have curbed the executive's tariff overreach, the path to resolution remains fraught with legal and political landmines. Investors who seize short-term dollar opportunities while hedging against prolonged uncertainty will be best positioned to navigate this landscape. The dollar's fate hinges on whether courts can curb executive excesses—or whether markets must brace for another round of “headline-driven chaos.”

Act now, but hedge wisely.