Dollar Inches Higher on Fed Bets and Data; Australian Dollar Surges Following RBA Rate Hike
By Sophie Kiderlin and Rocky Swift, Reuters — Published February 3, 2026
LONDON — The U.S. dollar continued its upward momentum on Tuesday, extending gains for a third consecutive day as a combination of positive economic data and shifting expectations regarding Federal Reserve policy outweighed lingering concerns about a potential U.S. government shutdown.
Dollar Index Strengthens
The dollar index, which tracks the greenback against a basket of major currencies, was last seen slightly higher at 97.62. This marked an extension of the dollar’s recently impressive two-day 1.5% advance. Meanwhile, the euro hovered near steady levels, trading at $1.1791. The recent dollar strength comes amid the nomination of Kevin Warsh as the next Fed chief, which has shaped market expectations. Investors widely believe Warsh may be less inclined to push for rapid rate cuts compared to other candidates, lending support to the dollar’s performance.
Market Reaction to Fed Leadership Outlook
Senior currency analyst Lee Hardman of MUFG commented, “Warsh’s nomination signals that the U.S. President is not looking to encroach on the Fed’s independence in setting policy. However, Warsh is also expected to support some easing by lowering rates initially.”
Despite these signals, Hardman anticipates that once the market adjusts to Warsh’s policy preferences, the dollar may soften later in the year: “We expect the dollar to re-weaken and the euro-dollar exchange rate to climb back above the 1.20 level as the Fed initiates rate cuts while the European Central Bank (ECB) holds rates steady.”
Economic Data Supports Dollar
Recent U.S. manufacturing data also contributed to the dollar’s firmness. The Institute for Supply Management (ISM) reported that its manufacturing Purchasing Managers Index (PMI) rebounded to 52.6 in January, marking the highest reading since August 2022 and indicating renewed industry growth.
However, the heavily watched U.S. jobs report for January will not be released this week due to a partial federal government shutdown, depriving markets of a key economic indicator.
Geopolitical Developments
Geopolitical tensions showed signs of easing as the U.S. secured a trade agreement with India and announced plans to resume nuclear negotiations with Iran. These developments helped maintain market calm, supporting risk sentiment globally.
Australian Dollar Surges After RBA Hike
In currency markets beyond the greenback, the Australian dollar (AUD) surged sharply after the Reserve Bank of Australia (RBA) increased its cash rate by 25 basis points to 3.85%. This marked the first RBA rate hike in two years, signaling growing concern over inflation and feeding market bets on further tightening this year.
The AUD/USD pair rose approximately 0.8% following the announcement, reaching $0.7002. The Australian dollar also soared to its highest level against the Japanese yen since 1990, climbing more than 1.5% to 109.31 yen.
Upcoming Central Bank Meetings and Markets Watch
Market participants are now turning their attention to key central bank meetings scheduled for later this week. Both the European Central Bank and the Bank of England are widely expected to keep policy rates on hold at their meetings on Thursday. Investors will closely monitor any hints from the ECB about how recent euro strength may shape future monetary policy decisions.
Focus on Japan’s Election
Japan’s lower house election on February 8 is another significant event on the horizon. Ahead of the vote, investors have been selling the yen and Japanese government bonds amid expectations that Prime Minister Sanae Takaichi’s party will secure a strong mandate to expand economic stimulus.
Last week, the yen gained some respite after Japanese policymakers indicated a willingness to coordinate with the U.S. to defend their currency. At present, the dollar trades at 155.93 yen—up 0.2% on the day but below the 1.5-year high of 159.45 yen reached in mid-January.
Matthew Ryan, head of market strategy at Ebury, noted, “This weekend’s election outcome will be key. A strong showing for Takaichi could push the yen back toward the 160 level against the dollar.”
Finance Minister Satsuki Katayama defended Premier Takaichi’s remarks supporting a weaker yen, stating that her views are aligned with standard economic principles as described in textbooks.
Cryptocurrency Movements
In the cryptocurrency market, bitcoin slipped 0.3% to $78,185.42, while ether dropped 2.2% to $2,288.52. —
Market Snapshot (As of February 3, 2026):
- Dollar Index: 97.62 (up modestly)
- EUR/USD: $1.1791 (steady)
- AUD/USD: $0.7002 (up 0.8%)
- USD/JPY: 155.93 yen (up 0.2%)
- Bitcoin: $78,185.42 (down 0.3%)
- Ether: $2,288.52 (down 2.2%)
As traders digest central bank policies and geopolitical developments, the currency markets continue to reflect evolving expectations on monetary policy and global economic trends.