IEEPA Tariff Ruling: Impact on Interest Rates and Foreign Exchange Markets

Investing.com - The U.S. Supreme Court has ruled that tariffs imposed under the International Emergency Economic Powers Act (IEEPA) are invalid, a move that could reshape the landscape of interest rates and foreign exchange markets. Barclays warns that investors should pay attention to issues such as fiscal deterioration, shifts in inflation expectations, and the reemergence of volatility in the currency markets.

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Barclays states that the ruling found that IEEPA does not authorize the president to impose tariffs, prompting the government to announce a temporary 10% global tariff and initiate a new Section 301 investigation. While alternative measures may ultimately compensate for lost tariff revenue, effective tariff rates are expected to decline in the short term.

Regarding U.S. Treasuries, Barclays expects the main impact to come from potential tariff refunds and their effect on fiscal balance. The bank estimates that refunds could total up to $175 billion, possibly financed through short-term Treasury issuance, which the market should be able to absorb at this scale.

However, any loss in tariff revenue could marginally widen the deficit, potentially steepening the yield curve and narrowing long-term swap spreads. Barclays notes that tariffs under IEEPA account for about 0.5% to 0.7% of GDP and are an important contributor to deficit control.

In the short end of the inflation market, lower effective tariff rates may be slightly bearish, although analysts say that due to pricing inertia and adjustment costs, commodity prices may not adjust quickly.

In the foreign exchange market, Barclays states that the ruling could be positive for risk-sensitive currencies, including high-yield emerging market currencies and some G10 currencies with strong fundamentals, as reduced tariff risks may support global growth expectations.

The ruling also highlights the U.S. system of checks and balances, which could reduce the risk premium investors require for dollar assets. Overall, Barclays believes the ruling supports the dollar against major currencies, although broader macro factors continue to shape currency trends.

Overall, Barclays states that the market has partially anticipated this outcome, but evolving policy responses, including new tariffs authorized under alternative laws, will determine whether interest rates and forex markets experience more pronounced reactions in the coming months.

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