US Dollar Forecast: Rises on Tax Cut Progress, But Fed Rate Cut Bets Cap Upside

Dollar Gains on Tax Plan Progress

The US dollar advanced on Wednesday as House Republicans pushed forward President Donald Trump’s $4.5 trillion tax cut proposal. The budget resolution narrowly passed in the Republican-controlled US House of Representatives late Tuesday, setting the stage for a Senate vote. Market sentiment improved, with the dollar index climbing 0.3% to 106.654, pulling away from an 11-week low of 106.126 reached earlier this week.

Against the yen, the dollar rose 0.3% to 149.47, bolstered by a rebound in US Treasury yields. The euro slipped 0.3% to $1.0484, while sterling hovered near a two-month high at $1.2648. Canadian and Mexican currencies showed mixed reactions ahead of potential new US tariffs, with the dollar rising to C$1.433, its highest since February 12, and remaining steady at 20.4464 Mexican pesos.

Technically, the trend is down, while trading on the weak side of the 50-day moving average at 108.012. If the downside momentum persists then look for a break into a support base formed by the former bottom at 105.420, the 50% level at 105.167 and the 200-day moving average at 104.965.

Treasury Yields Edge Higher

US Treasury yields nudged upward as investors braced for increased debt issuance linked to the tax plan. The benchmark 10-year yield rose 1 basis point to 4.306%, while the two-year yield, which is more sensitive to Federal Reserve policy expectations, increased by 2 bps to 4.119%.

The slight uptick followed Tuesday’s sharp drop in yields, which came as traders ramped up bets on further Fed rate cuts amid softening US economic data. Markets are currently pricing in 55 bps of easing by year-end, implying two quarter-point cuts and a 20% chance of an additional move.

Economic Data Highlights Uncertainty

US consumer confidence took a hit in February, marking its sharpest decline in 3.5 years, according to data released on Tuesday. This added to recent weak economic indicators, including declining existing home sales and a disappointing S&P Global PMI reading. Treasury Secretary Scott Bessent warned of underlying economic fragility, citing interest rate volatility, persistent inflation, and the economy’s dependence on government-sector job growth.

As investors await new home sales data and the PCE index, the Fed’s preferred inflation gauge, due Friday, market sentiment remains cautious. Fed Chair Jerome Powell recently noted that the central bank is in no rush to cut rates further, maintaining a balanced approach despite economic headwinds.

Market Forecast: Dollar Upside Limited

While the dollar’s rebound from recent lows offers near-term support, broader upside may be capped by expectations of Fed rate cuts and mixed economic signals. With the European Central Bank signaling a possible pause in its rate-cutting cycle, the euro could find support if US tariff threats and economic uncertainty persist. Traders will closely monitor upcoming US data and Fed commentary to gauge the dollar’s next move.

More Information in our Economic Calendar.