The dollar maintained its strength on Tuesday, bolstered by favorable economic indicators and changing expectations regarding Federal Reserve policy, which overshadowed worries about a potential U.S. government shutdown. The Australian dollar appreciated following the Reserve Bank of Australia’s anticipated rate increase, marking the initial of three significant central bank announcements this week. The yen continued to trade lower in the days leading up to a crucial election in Japan, while the finance minister downplayed remarks from the nation’s premier regarding the advantages of a weak currency. The greenback maintained its upward trajectory overnight in light of Kevin Warsh’s nomination as the next Fed chief, coupled with U.S. manufacturing data indicating a rebound in growth. A stalemate in Washington is set to postpone a crucial labor report scheduled for Friday. However, geopolitical tensions have eased as the U.S. successfully negotiated a trade agreement with India and announced the resumption of nuclear discussions with Iran. The dynamic has raised optimism regarding the expansion of the U.S. growth narrative,” Kyle Rodda noted. “The data also strengthened the U.S. dollar, contributing to the rebound that started on Friday following Trump’s choice of Kevin Warsh.

The dollar index, reflecting the performance of the greenback against a selection of currencies, remained relatively stable at 97.51, following a two-day increase. The euro increased by 0.1% to $1.1802, while the yen also rose by 0.1% to 155.47 per dollar. The dollar has experienced an upward trend following U.S. President Donald Trump’s nomination of Warsh as the next Fed chair, driven by expectations that he may be less inclined to advocate for swift rate cuts compared to other candidates. On Monday, Trump revealed a trade agreement with India that significantly reduces tariffs on Indian products in return for India ceasing its purchases of Russian oil and easing trade restrictions. On the geopolitical front, Iran and the U.S. are set to resume nuclear discussions on Friday in Turkey, with Trump cautioning that unfavorable outcomes are likely if an agreement is not achieved. “The Indian story is interesting, but really it’s about this idea that the tensions between the U.S. and Iran are seemingly easing, and all this pressure and threats that President Trump has imposed has brought Iran to the table,” said Rodrigo Catril.

The Institute for Supply Management reported on Monday that its manufacturing PMI increased to 52.6 last month, marking the highest level since August 2022. However, the anticipated jobs report for January will not be published this week due to a partial shutdown of the federal government. The RBA raised its key interest rate on Tuesday, resuming its hiking cycle following three reductions last year. It is anticipated that the European Central Bank and the Bank of England will maintain their current policy rates when they reveal their latest decisions on Thursday. The Australian dollar experienced an increase of 0.7%, reaching $0.6992. New Zealand’s kiwi appreciated by 0.3%, reaching $0.6017, while sterling increased by 0.1%, now at $1.3678. In anticipation of the lower house election on February 8, investors have divested from the yen and Japanese government bonds. This move is driven by expectations that a robust performance by Prime Minister Sanae Takaichi’s party would empower her to broaden stimulus measures. The yen experienced a brief reprieve last week following indications from Japanese policymakers about potential collaboration with the U.S. to safeguard their currency.

“The outcome of this weekend’s election will now be key, as a strong showing for Takaichi could push the yen back in the direction of the 160 level,” said Matthew Ryan. “It will be intriguing to observe if this will suffice to initiate the physical selling of FX reserves from Japan, as verbal intervention typically results in only a transient effect.” On Tuesday, Finance Minister Katayama supported Takaichi’s recent remarks about the advantages of a weaker yen, emphasizing that the premier had pointed out “what is written in textbooks.”