(HedgeCo.Net) When Citigroup told clients that its hedge fund customers were net sellers of the U.S. dollar around the market’s reaction to a U.S. Supreme Court decision striking down President Donald Trump’s emergency-law tariffs, it sounded like a narrow flow note—interesting, but tactical. In reality, it’s a compact snapshot of how sophisticated capital responds when trade policy, legal risk, and macro positioning collide.
The dollar is the world’s reserve currency, but it is also a crowded trade vehicle: an expression of U.S. growth exceptionalism, interest-rate differentials, geopolitical “risk-off,” and safe-haven demand—all at once. When a legal ruling suddenly reshapes the near-term path of U.S. tariff policy (and threatens to unwind a massive stockpile of already-collected tariff revenue), it doesn’t just move equities and headlines. It can reprice the probability distribution of inflation, growth, Fed policy, and global risk appetite in one burst. Hedge funds trade that repricing instantly.
Citi’s message was clear: the dollar slipped in volatile trading after the ruling, and hedge funds used that window to sell dollars—while the Australian dollar emerged as the most actively purchased major currency, and emerging-market currencies (especially in Asia and Latin America) saw inflows. Yet Citi also noted something equally important: their positioning indicator still showed moderate long-dollar positioning across hedge fund and traditional clients, implying this was a repositioning, not a wholesale abandonment of the “long USD” thesis.
To understand why this matters—and what it could foreshadow—you need to understand the event, the flow mechanics, and the macro logic behind selling dollars into a tariff shock.
The trigger: a court ruling that turned trade policy into a market-moving legal variable
The Supreme Court decision struck down Trump’s sweeping tariffs that were imposed under a national emergency law, a defeat with major implications for the global economy and the administration’s tariff strategy.
What made this event particularly market-relevant was not only the immediate policy question (“what happens to tariffs now?”), but the downstream uncertainty around the legal and fiscal consequences. Reuters reporting around the ruling highlighted the scale of the issue: more than $175 billion in tariff revenue may be subject to refund-related legal battles, and investors were already bidding up rights to tariff refund claims as a special-situations trade.
In other words, the ruling didn’t just change forward-looking tariff assumptions—it potentially reopened the past, creating a complex set of second-order effects: refunds, litigation timelines, government responses, and new tariff mechanisms.
And the administration did respond quickly. Reuters reported that after the emergency tariffs were struck down, the U.S. implemented a new temporary global import tariff of 10%, with the administration working to raise it to 15%—introducing further confusion and uncertainty about implementation and the legal pathway.
That combination—legal shock + policy improvisation + uncertainty about the next mechanism—is exactly the kind of regime where hedge funds will reduce “one-way” exposure and pivot to trades with clearer catalysts.
Citi’s flow read: dollars sold, AUD bought, EM inflows—yet positioning still long USD
Here’s what Citi’s note (as reported by Reuters) tells us in one line:
- Hedge fund clients were net sellers of the U.S. dollar around the ruling.
- The Australian dollar was the most actively bought major currency.
- Emerging market currencies saw inflows, especially in Asia and Latin America.
- Overall FX trading volumes were not unusually high, suggesting many expected the ruling.
- Citi’s positioning indicator still showed moderate long USD exposure among hedge funds and traditional investment clients.
This mix matters because it shows a classic hedge fund response: trade the impulse without fully flipping the book.
Selling dollars into the event is a tactical expression of: (1) reduced policy-risk premium, (2) a short-lived “risk-on” tilt, and (3) a desire to hedge headline risk. But maintaining moderate long-dollar positioning suggests many funds still believe the broader USD-supportive pillars—rates, growth differentials, global fragility—remain intact.
Why sell the dollar on a tariff strike-down? The macro logic
At first glance, tariffs being struck down could be read as “less trade friction” and therefore “more global growth,” which might weaken the dollar as capital rotates into higher-beta regions. But the dollar is rarely that simple. Several overlapping channels can push funds to sell USD quickly after a tariff shock breaks:
1) A repricing of U.S. inflation risk—and therefore Fed path expectations
Tariffs are inflationary at the margin. Removing or scaling back a tariff regime can reduce near-term inflation expectations relative to the counterfactual. Even a small repricing in expected inflation can affect the expected rate path and real yields—key drivers of FX. The ruling introduced immediate uncertainty about the tariff regime’s durability, and that uncertainty can translate into less confidence in sustained tariff-driven inflation impulse, at least temporarily.
2) A “risk-on” burst that rewards non-USD currencies
The Australian dollar is often treated as a liquid “risk-on” proxy: it can benefit when global growth sentiment improves or when investors want exposure away from U.S. safe haven positioning, especially into commodity-linked or Asia-sensitive narratives. Citi’s observation that AUD was the most actively bought major currency fits that playbook.
Similarly, emerging-market FX inflows suggest a temporary relaxation of defensive USD positioning—more willingness to own carry, growth exposure, or idiosyncratic EM opportunities.
3) Uncertainty can weaken USD if it is perceived as U.S.-specific
The dollar is a safe haven in global crises. But when the shock is U.S.-institutional—a Supreme Court ruling, refund battles, tariff mechanism confusion—some investors treat it as U.S.-policy noise rather than global stress. In that narrow window, selling USD can be a way to reduce exposure to U.S.-centric headline risk.
Reuters reporting underscored that the post-ruling environment created confusion over the new tariff regime and refund questions, while trade partners also faced continued uncertainty.
Why buy AUD and EM FX specifically? The hedge fund “rotation basket”
Hedge funds rarely move from one currency to one currency. They rotate across baskets that align with a regime shift.
Citi’s note that AUD was the most actively bought major currency suggests funds were building a liquid risk-on hedge: AUD is deep, easy to trade, and responsive to shifts in global sentiment.
The EM inflows—especially in Asia and Latin America—signal something else: carry and rebound positioning. When USD volatility spikes and then subsides, hedge funds often look to re-engage EM where real yields, policy credibility, or improving balance-of-payments narratives offer asymmetry.
Crucially, this doesn’t require a long-term bull view on EM. It can be a trade duration of days to weeks: capture the “relief bid” while keeping stop-losses tight and liquidity high.
The part many miss: volumes “normal” suggests positioning was ready
One of the most important details in Citi’s note (via Reuters) is that overall trading volumes were roughly consistent with recent activity, likely because markets had partially anticipated the ruling.
That implies the selloff was not a blind panic. It was a controlled reposition: funds had scenarios mapped, and when the ruling hit, they executed.
In practice, this tends to create a specific FX pattern:
- Immediate move on headline
- Fast follow-through as systematic strategies adjust
- Stabilization as discretionary funds fade extremes
- Re-crowding risk if the market converges on a new narrative
Citi’s “moderate long USD positioning remains” fits step 4: tactical selling doesn’t eliminate structural positioning—it just trims it.
What this says about hedge fund behavior in 2026: policy volatility is now a tradeable asset
The most telling takeaway from Citi’s flow read is not the dollar selling itself. It’s the speed and selectivity of the response.
Hedge funds are treating policy uncertainty—especially around tariffs—as a regime variable that can create short-lived dislocations across:
- FX (USD vs AUD/EM)
- Rates (Treasury curve repricing)
- Equities (global cyclicals vs defensives)
- Credit (risk appetite swings)
Reuters coverage of the broader tariff turmoil emphasized how disorienting the environment has been for markets, and how policy uncertainty can ripple through major asset classes.
In this kind of environment, the “right” hedge fund posture is often:
- lower net exposure
- more relative-value expressions
- faster turnover
- heavier reliance on liquidity
FX becomes a preferred battleground because it’s liquid, responsive, and allows precise macro expression.
The strategic question: does this mark a trend reversal for USD, or just event-driven trimming?
Citi’s own note leans toward the latter: their indicator still showed moderate long USD positions among hedge funds and traditional clients.
That suggests this was a tactical sell in response to a volatility spike, not a durable, consensus shift to “short USD.”
For a durable USD reversal, hedge funds would usually need one or more of the following:
- sustained U.S. rate disadvantage (not just a single-day repricing)
- a clear global growth acceleration favoring non-U.S. assets
- a significant deterioration in U.S. fiscal or political credibility
- a multi-week trend in flows, not just event rotation
Instead, what we have today is a classic hedge fund behavior: sell USD around a policy shock, buy risk-sensitive currencies, but keep core long-dollar bias intact.
What allocators should watch next: 5 indicators that will tell you if the “sell USD” trade persists
If you’re trying to decide whether this move is “one day” or “one quarter,” watch these:
- Follow-through in AUD and EM FX
If AUD strength persists and EM inflows broaden beyond a few regions, the rotation may be more than a headline reaction. - Dollar positioning data and dealer commentary
Citi already flagged moderate long USD positioning remains. The next question is whether that long gets reduced further or rebuilt. - Clarity on tariff replacement mechanisms
Reuters reported a temporary 10% tariff and an effort to move to 15%, with implementation uncertainty. A stable mechanism could reduce volatility; confusion could extend it. - Refund litigation trajectory
The $175B-scale refund debate is not just a legal story—it affects fiscal narratives, corporate cash flows, and “policy chaos” perception. - Rates reaction
FX won’t persistently move without rates backing it up. If the rates complex continues to price a different U.S. trajectory post-ruling, USD could face more than a one-day adjustment.
Bottom line
Citigroup’s observation that hedge fund clients sold dollars after the Supreme Court tariff ruling is a high-signal microcosm of macro trading in 2026: event-driven, policy-sensitive, liquidity-first. Funds used the ruling’s volatility window to trim USD exposure, rotate into AUD, and add selectively to EM FX, while still maintaining moderate long-dollar positioning overall.
It’s not a declaration that “the dollar is done.” It’s a declaration that tariff policy is now a volatility engine, and hedge funds will treat it like any other: trade the impulse, hedge the tail, and keep the core thesis unless the regime truly breaks.