The US dollar has experienced renewed strength following the Trump administration's tariff announcements in February 2026, marking a significant shift in currency markets as traders reassess the economic implications of import surcharges. The implementation of a 10 percent temporary import surcharge under Section 122 of the Trade Act, later increased to 15 percent, has ignited a complex debate about currency dynamics, inflation, and the future of US monetary policy. While the tariff landscape remains volatile and subject to legal challenges, forex markets have responded with notable USD gains against major pairs like EUR/USD and AUD/USD, suggesting that investors are recalibrating their expectations around trade policy and its ripple effects through the global financial system.
The Tariff Policy Shift And Market Context
The Supreme Court's cancellation of previous tariffs set the stage for a dramatic policy pivot. Rather than abandon import duties entirely, the White House introduced a flat 10 percent tariff on all imports under Section 122, a time-limited authority permitting duties for up to 150 days.[4] This proclamation recreates many product-specific exemptions from the earlier regime, excluding critical minerals, energy products, agricultural goods, pharmaceuticals, and electronics from the surcharge.[4] Shortly after implementation on February 24, 2026, the administration signaled its intention to raise the rate to 15 percent, demonstrating a commitment to protectionist measures despite the judicial setback.[4]
This policy announcement created immediate market uncertainty. Investors faced conflicting signals: tariff removal could stimulate the economy by reducing costs for businesses and consumers, yet new duties threatened to rekindle inflation concerns. The market's response has been telling, with currency traders favoring the dollar as they processed the long-term implications of sustained protectionism.
Currency Market Dynamics And Dollar Strength
The EUR/USD pair has slipped as traders reassess the case for dollar strength.[1] According to market analysis, the cancellation of tariffs revived debate over American exceptionalism, providing support for the greenback.[1] For much of 2025, the US economy benefited from investments in artificial intelligence and rising productivity; the removal of tariffs could amplify this momentum by functioning as fiscal stimulus.[1] The possibility of tariff removal signaled a potential return to conditions favoring US economic growth, a narrative that strengthens currency demand.
However, the broader currency picture remains complex. As of January 2026, the US dollar was 6.3 percent weaker than its December 2024 average, according to Yale Budget Lab research.[2] This weakness contradicts the traditional expectation that US tariffs should strengthen the dollar. The explanation for this disconnect involves multiple competing forces: while tariffs theoretically support the dollar, other factors including shifting economic outlooks, changing perceptions of US institutional credibility, and expectations of lower interest rates have exerted downward pressure.[2] The real trade-weighted dollar entered 2025 roughly 20.3 percent stronger than its long-run average, creating conditions for potential mean reversion that could partially offset tariff-driven strength.[2]
Trading dynamics around currency pairs reflect these tensions. The Federal Reserve's monetary policy stance has emerged as a critical factor. Fed Governor Christopher Waller's recent comments suggest willingness to join other FOMC officials in supporting a prolonged pause in rate cuts, with only significant employment weakness likely to reverse this stance.[1] Derivatives data indicates a 44 percent probability of three rate cuts by the Federal Reserve in 2026, indicating market expectations for a measured approach to monetary policy.[1] This combination of fiscal stimulus through tariffs and relative Fed patience creates conditions supporting dollar appreciation in the near term.
Broader Economic Implications
The tariff regime has significant long-term consequences for the US economy. Budget Lab estimates suggest that tariffs will raise approximately 1.3 trillion dollars over 2026-35, assuming Section 122 duties expire after 150 days.[4] The economic impact extends beyond revenue generation; tariffs are projected to increase the unemployment rate by 0.3 percentage points by the end of 2026, with the long-run economy persistently 0.1 percent smaller, equivalent to about 30 billion dollars annually in 2025 dollars.[4] If Section 122 is extended beyond the 150-day window, the long-run economic hit doubles in magnitude.
Metal products, electrical equipment, and motor vehicles face the heaviest tariff burdens, with apparel and related goods joining this list if Section 122 is extended.[4] These commodities span critical supply chains affecting consumer prices and business competitiveness globally. A weakening US dollar exacerbates the price impact of tariffs by making all imports more expensive in dollar terms, adding another layer of inflationary pressure that policymakers must navigate.[2]
Trading Considerations And Takeaways
For SimFi traders and investors monitoring currency markets, several key insights emerge. The USD strength story reflects optimism about American economic exceptionalism relative to other developed economies, but this narrative remains contingent on policy implementation and economic data. The temporary nature of Section 122 tariffs introduces expiration risk; markets may reprice USD exposure as the 150-day window approaches.
Watch the intersection of tariff developments, Fed communications, and employment data. These three elements will likely drive currency volatility through the remainder of 2026. Currency traders should monitor whether the tariff regime gets extended, modified, or abandoned following potential legal challenges or political shifts. Understanding this policy backdrop provides essential context for anticipating forex market movements and positioning accordingly in an increasingly unpredictable environment.