Wood anatomical traits can underpin tropical forest structural and functional changes across soil water gradients and therefore could improve our mechanistic understanding of how plants adapt to environmental change. We assessed how the variation in the forest maximum height (Hmax), stem diameter, and wood density (WD) is associated with variation in xylem traits (area of fibers and parenchyma, conductive area [CondA, sum of all vessels lumens], vessel lumen area [VLA], vessel density [VD], and vessel wall reinforcement [VWR]) across 42 plots of a Brazilian Atlantic Forest habitat that span strong soil water gradients. We found that in wetter communities, greater height and lower WD were associated with greater parenchyma area (capacitance), and lower fibers, VD, VWR. Contrastingly, in drier communities, lower height was associated with higher fiber area (xylem reinforcement), WD, VD, and VWR, while parenchyma area and vessels are reduced. Tree communities vary from conservative resource-use and structurally dependent hydraulic safety (Fibers) to acquisitive resource-use and capacitance dependent hydraulic safety (parenchyma). Such a fiber-parenchyma trade-off (FPT) underlies the variation in tree height across a soil water gradient. Wood anatomy is fundamental to understanding and predicting the impacts of environmental change on forest structure.