Dollar on Edge: Supreme Court Tariff Ruling and Deficit Warnings Collide

WikiFX

| 2026-01-12 17:10

Abstract：The US Dollar faces a double-header of fiscal event risks: an imminent Supreme Court ruling on tariffs and Moody's warning over Trump's $1.5 trillion defense spending plan.

The US Dollar index is trading near crucial resistance levels as traders navigate a minefield of fiscal and legal risks emanating from Washington. Beyond the immediate payroll data, two structural developments involving the Trump administration are driving medium-term currency sentiment.

The Supreme Court's “Tariff Verdict”

Markets are bracing for a potential ruling from the US Supreme Court as early as Friday regarding the legality of President Trump's use of the International Emergency Economic Powers Act (IEEPA) to impose tariffs.

The Stakes: A ruling against the administration could strip the White House of a key tool in its “America First” trade arsenal, potentially unwinding the “Trump Trade” (Long USD, Short Treasuries) that has dominated recent months.

Market Impact: Analysts suggest that a status quo ruling or a delay favors the Dollar, as tariffs generally reduce imports and improve the trade balance. Conversely, a strike-down would likely be USD-negative and boost risk currencies like the EUR and AUD.

Moody's Sounds the Alarm on Deficits

Simultaneously, fiscal hawks are reacting to President Trump's proposal to hike the US military budget to $1.5 trillion by 2027—a near 50% increase from current levels.

Credit Risk: Moody‘s Analytics has issued a sharp warning, stating that such an expansion is unlikely to be offset by spending cuts elsewhere.

David Rogovic, Senior VP at Moody’s Sovereign Risk group, noted that “politically and policy-wise, it is difficult to find funding sources.”

The Debt Spiral: The Committee for a Responsible Federal Budget estimates the plan could add $5.8 trillion to the national debt over a decade.

The FX Implication

While fiscal expansion can temporarily boost GDP and the currency (via higher yields), the long-term corroding effect of “twin deficits” (fiscal and current account) remains a structural headwind for the Greenback. If the bond market rebels against this new supply, we could see a steepening of the yield curve, complicating the Fed's fight against inflation.