The dollar was on the defensive on Tuesday in markets cautious about US-Iran tension ahead of midterm elections, while the Aussie dipped after the Reserve Bank of Australia hiked rates as expected. Oil prices experienced a modest increase during early Asian trading, with Brent crude futures rising by 0.5% to $105.25, partially recovering from Monday’s significant decline of over 7%. That followed US “defensive” strikes on Iran’s Qeshm Island, which dampened earlier optimism regarding discussions between the two parties aimed at resolving the eight-month conflict. An AI-driven stock market slump exhibited minimal indications of abating, adversely affecting risk sentiment and providing a degree of support to the dollar. Tension surrounding the US midterm elections remains significant, contributing to the dollar’s status as a safe-haven asset.
The dollar index, which measures the currency against a basket of currencies that includes the yen and the euro, traded a shade stronger at 101.81, following Monday’s decline to a one-month low. “Cheaper energy is reshaping FX dynamics, while AI concerns and US election risks reinforce our view that the USD remains supported,” Sim Moh Siong said in a note. Additionally, the strength of the dollar was bolstered by China’s offshore yuan, which was poised for its most significant single-day drop since May, having depreciated by as much as 0.34% to 6.67 per dollar.
The sharp move occurred after the People’s Bank of China announced an increase in the foreign exchange reserve requirement ratio, which is expected to tighten dollar liquidity conditions and decelerate the recent appreciation of the yuan.
The euro was steady at $1.1182 as the dollar ticked higher. The Japanese yen fetched 157.92 per dollar, remaining largely unchanged during a domestic holiday. Central banks scheduled to issue policy statements this week include those of Australia, Britain, Norway and Sweden. The Reserve Bank of Australia raised the official cash rate, opens new tab by 25 basis points to 4.85% as expected on Tuesday, its highest level since December 2008. The move brought total tightening this year across five increases to 125 basis points. Investors had placed significant bets on an increase, as policymakers had cautioned about the upside risks associated with core inflation, which stands at 3.7%-substantially exceeding the RBA’s target range of 2% to 3%.
The Australian dollar declined as much as 0.35% to a low of $0.6974 per US dollar after the rate decision. The kiwi was flat at $0.5616. Sterling exhibited relative stability, trading at $1.3401. The latest PMI data showed British manufacturers started the final quarter of 2026 with the strongest output growth in more than two years. Economists anticipate that the Bank of England will increase its bank rate to 4.0% from 3.75%. This would mark the first rate hike since August 2023, a period when inflation remained significantly above the 2% target, exceeding it by more than threefold.
