By Michael O’Neill
The February 20 US Supreme Court decision that ruled Trump’s tariffs levied under the International Emergency Economic Powers Act (IEEPA) were illegal opened a can of worms that have implications for the next 149 days.
The Court determined that the IEEPA does not authorize a president to impose tariffs, because they are a form of taxation, and the Constitution grants Congress alone the power to lay and collect taxes, duties, imposts and excises.
Even worse, there is around $170 billion in illegally collected taxes that must be refunded. FedEx has already launched a lawsuit to collect what it is owed.
Hell Hath No Fury Like a President Scorned
Trump was furious. Within minutes of the Supreme Court ruling, he tweeted, “The Supreme Court’s ruling on tariffs is deeply disappointing, and I’m ashamed of certain members of the court, absolutely ashamed for not having the courage to do what’s right for our country.”
Then he went to his backup plan and announced a 10% blanket tariff under Section 122 of the 1974 Trade Act, effective February 24.
Section 122 was designed specifically for a balance-of-payments crisis that happened during the early 1970s. That was when President Richard Nixon ended the convertibility of the US dollar to gold. It was a defensive move to protect the dollar’s anchor in a fixed-exchange rate world amid a ballooning deficit. That probably will not work either.
In 2026, the US does not have a balance of payments issue. It has a floating currency and the deepest capital markets on the planet. Odds are it meets the same legal fate as the IEEPA tariffs.
Where Will All the Investments Go?
The Supreme Court ruling on IEEPA also pulled the rug out from under the “deals” negotiated in their shadow. Trump coerced substantial concessions from America’s trade partners by threatening punitive tariffs, including demands to invest substantial sums in America.
If the leverage used to secure those concessions has now been deemed unlawful, it stands to reason that the rest of the terms are null and void. Remove the threat and the urgency to comply evaporates.
Trump boasted that his tariffs had secured $17 trillion in new foreign investment. He pointed to a $1.4 trillion commitment from the United Arab Emirates for AI and data centres, along with $350 billion from South Korea, $500 billion from Japan, and $600 billion from the European Union. India, he added, was eager to negotiate a trade deal.
Those investments may not happen. The ink was barely dry on the Supreme Court’s decision before those countries began reconsidering their plans. The European Parliament delayed ratification of its trade deal with Washington, saying it needed greater clarity on the next steps. India shelved a planned trade meeting rather than rush into an agreement, while South Korea convened emergency talks to reassess its previously announced $350 billion investment plan.
About Last Night
Trump opened his 1 hour and 47-minute State of the Union by declaring the economy “the greatest comeback in American history.” Jobs are booming. Markets are soaring. Inflation is beaten. Factories are humming. According to the President, prosperity is not just back, it is setting records.. As usual, facts were in short supply.
Last night’s oratorical endurance test left the audience recalling President Ronald Reagan’s speeches with fondness. Reagan was known as the Great Communicator because he could distill complicated policy into a sentence people remembered. “Government is not the solution…” fit on a bumper sticker. “Mr. Gorbachev, tear down this wall.” Fourteen words. Mic drop.
In contrast, Trump builds a playlist of grievances with applause breaks. Where Reagan explained, Trump performed, loudly and at length. At the end of Trump’s speech, even the teleprompter needed a drink.
Forex Flummoxed
The Supreme Court decision threw a spanner into the works for FX markets. Traders were contentedly ignoring tariff announcements, threats, and on-again-off-again trade deals and had turned their attention to diverging central bank monetary policies with an eye on US/Iran developments.
The Reserve Bank of Australia has a hawkish bias and recently raised rates to 3.85%. The Fed remains on a cautious hold at 3.75%, balancing a softening labour market against persistent 3% core inflation. Meanwhile, the ECB maintains its 2% “good place” equilibrium. In contrast, the Bank of England has adopted a more dovish stance and is expected to cut rates to 3.50% next month. The Bank of Canada is on hold and policymakers are unsure of the future path of rates.
For FX traders, the outlook for the Fed is key. A spate of reasonably strong economic reports has pushed the first rate cut out until July, with a second cut by December. That, and elevated US-Iran tensions, have underpinned the US dollar. USDCAD direction is being determined by the US dollar, and it remains trapped in a 1.3600-1.3750 range.
The lack of interest rate clarity or uniformity and the threat of a US-Iran war leave FX markets in a sad state of affairs.
