The domestic story was supportive for the dollar in terms of that big surprise from the ISM.
In the quiet arithmetic of global markets, the US dollar found its footing Tuesday on the unexpected return of American manufacturing growth and a recalibration of Federal Reserve expectations, while the Australian dollar rose in anticipation of its central bank tightening policy. Geopolitical anxieties, long a source of market unease, softened as the US and India struck a trade accord and Iran signaled willingness to return to the nuclear negotiating table. Three central bank decisions loom over the week ahead, each one a small hinge on which larger economic fates may turn.
- A surprise expansion in US manufacturing data caught traders off guard, injecting fresh momentum into the dollar and pushing government shutdown fears to the margins.
- The nomination of Kevin Warsh as the next Fed chair — perceived as hawkish on rate cuts — quietly reshaped expectations and added further lift to the greenback.
- The Australian dollar climbed as markets positioned for the RBA's first rate hike after three consecutive cuts, pulling New Zealand's currency and sterling modestly higher alongside it.
- Japan's yen faced quiet but persistent selling pressure as investors bet that an election victory for PM Takaichi could unleash expansionary spending — a signal markets received clearly despite official attempts to soften it.
- Geopolitical temperature dropped as a US-India tariff deal and the resumption of Iran nuclear talks in Turkey suggested Trump's pressure diplomacy was yielding negotiated results rather than escalation.
- With the ECB, Bank of England, and RBA all set to speak this week, currency markets are holding their breath — the dollar's momentum may hold, or the week's decisions may redraw the map entirely.
The dollar held steady Tuesday morning, lifted by two converging forces: a manufacturing report from the ISM that showed American factories expanding again after a stretch of contraction, and a shift in expectations around the Federal Reserve following President Trump's nomination of Kevin Warsh as its next chair. Warsh was seen as less likely to pursue aggressive rate cuts than other candidates under consideration, a perception that gave the greenback added appeal. The dollar index sat at 97.50, consolidating gains from the prior two sessions, while the usual worry about a government shutdown faded into the background.
Geopolitical developments added to the calmer mood. The US and India reached a trade agreement reducing tariffs on Indian goods in exchange for India halting purchases of Russian oil and lowering its own barriers. More strikingly, Iran and the US announced they would resume nuclear talks Friday in Turkey — a thaw that had seemed improbable weeks earlier. Currency strategist Rodrigo Catril of National Australia Bank credited the ISM surprise as the primary dollar driver, but noted the Iran development was the more consequential geopolitical signal, suggesting Trump's pressure campaign had moved the needle at the negotiating table.
Elsewhere, the Australian dollar gained 0.3 percent to $0.6965 as investors positioned ahead of the Reserve Bank of Australia's anticipated rate hike — its first tightening move after three cuts the previous year. New Zealand's dollar and sterling edged higher in sympathy. The yen, by contrast, slipped as markets priced in the possibility that Japan's February 8 election could hand Prime Minister Takaichi a strong mandate for expansionary fiscal policy. When Takaichi suggested there were merits to a weaker yen, Finance Minister Katayama's attempt to walk back the comment as textbook economics did little to change the market's read.
Three central bank decisions will define the week: the RBA expected to hike, the ECB and Bank of England both anticipated to hold. Bitcoin gained 0.5 percent to $78,840, and ether rose modestly. Whether the dollar's momentum survives the week's policy announcements — or is reshaped by them — remains the open question hanging over global currency markets.
The dollar was holding steady on Tuesday morning, buoyed by a pair of developments that had shifted the calculus for traders: fresh economic data from the United States showing manufacturing had returned to growth, and a recalibration of expectations around what the Federal Reserve might do next. The usual anxieties—talk of another government shutdown in Washington—had receded into the background. Meanwhile, the Australian dollar was climbing in anticipation of its central bank moving to raise interest rates, the first of three significant monetary policy announcements scheduled for the week ahead. The yen, by contrast, was sliding.
The Institute for Supply Management's manufacturing report had arrived as a surprise to the upside, signaling that American factories were expanding again after a period of contraction. That data point, combined with shifting sentiment around Federal Reserve policy following President Trump's nomination of Kevin Warsh as the next chair, had given the greenback momentum. Warsh was widely seen as less inclined toward aggressive rate cuts than some of the other candidates who had been under consideration, a perception that supported the dollar's appeal. The dollar index, which tracks the greenback against a basket of major currencies, sat at 97.50, little changed from the gains it had accumulated over the previous two days.
Geopolitical developments had also eased some of the pressure that had been building. The United States and India had reached a trade agreement that reduced tariffs on Indian goods in exchange for India committing to halt purchases of Russian oil and to lower its own trade barriers. More significantly, Iran and the United States had signaled they would resume nuclear negotiations on Friday in Turkey—a thaw in tensions that had seemed unlikely weeks earlier. Trump had warned that failure to reach a deal would have serious consequences, but the mere fact that talks were resuming suggested a shift away from the escalatory rhetoric that had dominated recent months.
Rodrigo Catril, a currency strategist at National Australia Bank, attributed much of the dollar's strength to the manufacturing surprise. "The domestic story coming from the U.S. was also supportive for the dollar in terms of that big surprise from the ISM," he said. He noted that while the India trade deal was noteworthy, the real driver was the apparent easing of tensions with Iran—a development that suggested Trump's pressure campaign had produced tangible results at the negotiating table.
The Australian dollar had gained 0.3 percent to $0.6965 as investors positioned themselves ahead of the Reserve Bank of Australia's decision. The central bank was expected to resume raising rates after having cut three times in the previous year. New Zealand's currency strengthened alongside it, rising 0.3 percent to $0.6017. Sterling edged up 0.1 percent to $1.3676. The euro, meanwhile, gained 0.1 percent to $1.1804, while the yen ticked up 0.1 percent to 155.53 per dollar—a modest move that masked deeper selling pressure in Japanese assets.
The weakness in the yen reflected expectations that Japan's upcoming election on February 8 could produce a strong mandate for Prime Minister Sanae Takaichi, potentially leading to more expansionary fiscal spending. Investors had been selling both the yen and Japanese government bonds on that prospect. When Takaichi had recently suggested there were benefits to a weaker currency, Finance Minister Satsuki Katayama had moved to defend the comment, characterizing it as merely a reference to standard economic textbook wisdom. The distinction mattered little to markets; the signal had been received.
Three major central banks would announce decisions this week. The Reserve Bank of Australia was expected to raise rates. The European Central Bank and the Bank of England were both anticipated to hold policy steady when they announced on Thursday. In the cryptocurrency markets, bitcoin had gained 0.5 percent to $78,840.02, while ether rose 0.1 percent to $2,343.94. The week ahead would test whether the easing of geopolitical tensions and the shift in monetary policy expectations could sustain the dollar's momentum, or whether the central bank decisions would reshape the landscape entirely.
Notable Quotes
The domestic story coming from the U.S. was also supportive for the dollar in terms of that big surprise from the ISM.— Rodrigo Catril, currency strategist at National Australia Bank
The Hearth Conversation Another angle on the story
Why does manufacturing data matter so much to currency traders? It seems like one report among many.
Because it signals whether the real economy is actually growing or contracting. When the ISM came in stronger than expected, it told traders that American businesses were expanding, which makes the dollar more attractive—it suggests the Fed might not need to cut rates as aggressively as some had feared.
And the Warsh nomination—how does that change the picture?
Warsh is seen as more hawkish on rates than some other candidates Trump considered. Markets interpret that as meaning fewer, smaller rate cuts ahead. A higher interest rate environment makes holding dollars more appealing because you earn more on them.
So geopolitical easing actually helps the dollar?
In this case, yes. When tensions ease, investors don't need to flee into safe havens as much. They can take on more risk. But the dollar still benefits because the U.S. economic data is solid and the Fed outlook has shifted.
What about the Australian dollar rising—is that just about the rate hike?
Partly. When a central bank raises rates, its currency typically strengthens because higher rates attract foreign investment. But it's also about positioning ahead of the decision. Traders are betting the RBA will move, so they're buying the Australian dollar in anticipation.
And the yen weakness despite the election—that seems counterintuitive.
Not really. Japanese investors and speculators are selling the yen because they expect the election to produce more government spending, which weakens the currency. It's a self-fulfilling trade—everyone knows what's likely to happen, so they position accordingly.