The US Supreme Court will hear oral arguments on 5 November on President Trump’s use of the International Emergency Economic Powers Act (IEEPA) to impose tariffs on a broad range of goods and countries. The US government could be forced to refund any where between USD 150-200 billion of tariff revenue if IEEPA were to be declared illegal in it's entirety. The single largest implication if the IEEPA in it’s entirety was to be declared illegal will be on US fiscal deficits. In September, the Congressional Budget Office (CBO) estimated that existing tariffs would generate revenue of USD 3.3tr between 2025 and 2035, and up to USD 4tr in savings, assuming lowered interest expense of narrower deficits. Assuming a 150-200 BN USD refund, implies 7-8% of 2025 US Federal budget deficit. This implies a steeper UST yield curve as long end gets unhinged due to fiscal implications while short end moves lower or remains same due to better rate cut probabilities. DXY will also sharply drop lower in case of complete removal of IEEPA. US equities might do well as corporates gain additional revenue or see better consumer demand but it won’t be sufficient to defend DXY as higher long end yields will push DXY lower.
