The U.S. dollar paused on Tuesday after posting strong gains over the previous two sessions, as markets reassessed expectations surrounding Federal Reserve policy following the nomination of Kevin Warsh as the next Fed chair.
At the same time, the Australian dollar drew significant attention after the Reserve Bank of Australia raised interest rates by 25 basis points, making it the first major developed-market central bank to tighten policy since the Bank of Japan.
By 11:22 ET (16:22 GMT), the Dollar Index, which measures the greenback against a basket of six major currencies, was down 0.2% at 97.42. This came after a sharp 1.5% advance over the prior two trading days.
Dollar support fades amid data delays
The dollar had strengthened late last week following U.S. President Donald Trump’s decision to nominate Kevin Warsh to lead the Federal Reserve. Investors expect Warsh to favor a more cautious approach to interest rate cuts while also supporting a reduction in the Fed’s balance sheet.
Additional support came from data released on Monday showing that U.S. manufacturing returned to expansion in January, highlighting the resilience of the world’s largest economy.
According to ING, the ISM manufacturing index rose to 52.6, marking its first expansionary reading in a year and its strongest level since August 2022. The report showed notable improvements in production, new orders, and order backlogs, signaling solid momentum in output.
However, sentiment was slightly dampened by a political deadlock in Washington that triggered a partial government shutdown. As a result, the closely watched U.S. monthly jobs report scheduled for Friday has been delayed, along with a job openings report due later in the session.
ING noted that a House vote to extend government funding could take place as early as Tuesday. If approved, the delayed economic data could be released next week.
Aussie dollar jumps after RBA rate hike
The Australian dollar surged, with AUD/USD climbing 1% to 0.7018 following the RBA’s decision to raise interest rates.
The central bank signaled that further tightening may be necessary to address persistently high inflation. This follows a renewed rise in inflation toward the end of 2025, with core inflation moving back above the RBA’s 2%–3% target range.
The RBA also upgraded its growth and inflation forecasts, stating that price pressures are now expected to remain above target until at least 2027.
Former Pimco CEO Mohamed El-Erian described the move as a sign of growing policy divergence among advanced economies, noting that central banks are moving away from the synchronized approach seen in recent years. He added that rising dispersion, volatility, and fragmentation are likely to be defining themes this year.
Asian and emerging market currencies react
In Asia, USD/JPY slipped 0.1% to 155.75 after climbing back above the 155.00 level, as uncertainty persisted over possible intervention by Japanese authorities to support the yen.
USD/INR dropped 1.2% to 90.128, its lowest level since mid-January, after the United States and India announced a new trade agreement. Under the deal, U.S. tariffs on Indian goods will be reduced to 18% from 50%, while India agreed to further open its markets and reduce purchases of Russian oil.
Meanwhile, USD/CNY edged 0.1% lower to 6.9377, supported by a series of strong official fixings that pushed the Chinese currency to its strongest level since mid-2023.
Euro and pound edge higher
In Europe, EUR/USD rose 0.2% to 1.1811, recovering modestly after retreating from last week’s highs near the 1.20 level.
French consumer prices fell 0.3% in January, resulting in an annual increase of just 0.3%. The weak inflation data has renewed concerns about deflation ahead of the European Central Bank’s policy meeting on Thursday, where rates are widely expected to remain unchanged at 2% for a fifth consecutive meeting.
ING noted that further euro weakness would reduce the likelihood of exchange-rate commentary from ECB officials.
GBP/USD also advanced 0.2% to 1.3697, with the Bank of England expected to keep interest rates unchanged at its upcoming policy meeting.
