The Dollar saw a muted depreciation against a broad range of currencies on the Supreme Court’s tariff decision. We see some potentially important positive channels that could eventually overturn the initial negative USD reaction. The small decline in the effective tariff rate should provide a positive impulse to growth, and the new restrictions imposed by the Court could help recoup investor confidence and narrow the perceived scope of potential policy changes ahead. We believe that after SCOTUS rolling back of IEEPA, tariff uncertainty levels will come down. Hence the policy risk premium should also subside. SCOTUS ruling show that the rule of law still exists in US policies towards the RoW. Also it’s notable that, even if tariffs are continued via other Sections, they will lack the flexibility of IEEPA in a way that might constrain the administration's ability to use tariffs as a tool of leverage (eg the % tariff applied under Section 122 must apply equally to all parties). 301, meanwhile, has flexibility but again requires investigations at the country/product level. In essence, this could reduce US policy risk premium applied in FX and could also help lessen tariff volatility over the medium-term (both threatened and realized) compared to 2025. US growth looks set for another stellar year after significant productivity growth, stabilising employment environment as well as strong earnings growth from US equities. The hawkish Fed minutes imply that there are no rate cuts till May as long as Powell stays as Fed Chair. The first mention of Fed hikes in this cycle in the January minutes is a notable development and an important risk to monitor this year. Hence we should not write dollar off yet. The biggest loser in case of a dollar rally might be JPY as there has been no obvious signs of Japanese repatriation flows. The recent strength in the Yen and the long-end JGB rally following the LDP’s landslide election victory (in addition to more frequent risk wobbles) have sparked renewed focus on potential repatriation flows from Japanese investors. Our metric, based on the monthly ITS report, continues to suggest still-steady demand for foreign assets through January 2026. Looking ahead, we continue to think that significant repatriation flows by unhedged investors would likely require a much narrower rate differential. As a result, we think investors looking for a notable shift from Japanese investors towards domestic assets are likely to be left disappointed over the nearer term.
