The U.S. dollar held onto recent gains on Tuesday, supported by upbeat economic data and shifting expectations around Federal Reserve policy. These factors outweighed lingering worries over the risk of another U.S. government shutdown.
The dollar index, which tracks the greenback against a basket of major currencies, eased slightly by 0.1% to 97.46 after rising 1.5% over the previous two sessions. The euro advanced 0.2% to $1.1808, while the Japanese yen strengthened modestly to 155.43 per dollar.
The Australian dollar jumped sharply after the Reserve Bank of Australia delivered its first interest rate hike in two years. Meanwhile, the yen stabilized following a two-day decline, as Japan’s finance minister sought to downplay comments from the prime minister suggesting benefits from a weaker currency.
The dollar’s recent strength has been reinforced by the nomination of Kevin Warsh as the next Federal Reserve chair, along with U.S. manufacturing data showing a return to expansion. While a political stalemate in Washington is expected to delay a key U.S. labor market report due on Friday, geopolitical risks eased after the U.S. struck a trade deal with India and confirmed that nuclear talks with Iran will resume.
Kyle Rodda, senior market analyst at Capital.com, said the factory data boosted confidence that U.S. economic growth is becoming more broad-based. He added that the report also supported the dollar’s rebound, which began after Donald Trump selected Warsh for the top Fed role.
The greenback has continued to climb since Trump’s nomination, as investors expect Warsh to be less inclined toward rapid interest rate cuts compared with other potential candidates.
On Monday, Trump announced a trade agreement with India that lowers U.S. tariffs on Indian goods in exchange for India halting Russian oil purchases and easing trade barriers. On the geopolitical front, U.S.-Iran nuclear negotiations are set to restart on Friday in Turkey, with Trump warning of serious consequences if talks fail.
Rodrigo Catril, a currency strategist at National Australia Bank, said easing tensions between the U.S. and Iran have been a key driver for markets, suggesting that pressure from Washington may have brought Tehran back to the negotiating table.
U.S. manufacturing data also helped lift sentiment. The Institute for Supply Management reported that its manufacturing PMI rebounded to 52.6 last month, the strongest reading since August 2022. However, the closely watched January U.S. jobs report will not be released this week due to the partial government shutdown.
The RBA raised its cash rate by 25 basis points to 3.85%, restarting its tightening cycle after three cuts last year. The move pushed the Australian dollar higher, as the central bank’s inflation warnings fueled expectations of at least one more rate increase this year.
The European Central Bank and the Bank of England are both expected to leave interest rates unchanged when they announce policy decisions later this week.
The Australian dollar climbed 0.9% to $0.7007 and rose 1.1% against the yen to 108.85, approaching record highs. New Zealand’s kiwi gained 0.6% to $0.6033, while sterling edged up 0.2% to $1.3693.
In Japan, investors have sold the yen and government bonds ahead of a lower house election on February 8, betting that a strong result for Prime Minister Sanae Takaichi’s party would allow for expanded fiscal stimulus. The yen found temporary support last week after Japanese officials hinted at possible coordinated action with the U.S. to stabilize the currency.
Matthew Ryan, head of market strategy at Ebury, said the election outcome could be critical, warning that a strong showing for Takaichi may push the yen back toward the 160 level. He added that verbal intervention typically has only a short-lived effect unless backed by actual currency market action.
Japan’s Finance Minister Satsuki Katayama defended Takaichi’s recent remarks on Tuesday, saying they reflected standard economic theory rather than a policy signal.
In cryptocurrency markets, bitcoin slipped 0.6% to $77,955.57, while ether fell 1.8% to $2,300.74.
