Dollar Eases as Middle East Tensions and US Midterms Keep Investors Cautious; Aussie Dips After RBA Hike

The US dollar weakened on Tuesday as investors stayed cautious over tensions between the United States and Iran ahead of US midterm elections. The Australian dollar fell after the Reserve Bank of Australia raised interest rates as expected.

Dollar index edges lower

The dollar index, which measures the US currency against a basket of major currencies including the yen and euro, edged 0.1% lower to 101.72. That followed Monday's decline to a one-month low. The euro gained 0.1% to $1.1195 as the dollar weakened. The Japanese yen traded at 157.81 per dollar, largely unchanged during a domestic holiday.

Investors are weighing uncertainty around the US midterm elections and an AI-driven stock market sell-off. Those concerns continued to weigh on sentiment but also provided some support for the dollar. OCBC FX strategist Sim Moh Siong said relief over oil prices was increasing, but broader market conviction remained weak. He added that lower energy costs were reshaping foreign exchange dynamics, while concerns over artificial intelligence and US election risks continued to provide support for the dollar.

Oil rebounds after US strikes on Iran

Oil prices edged higher in Asian trading. Brent crude futures rose 0.5% to $105.25 a barrel, recovering some ground after plunging more than 7% on Monday. The rebound followed US strikes on Iran's Qeshm Island. The strikes undermined earlier optimism around negotiations between the two countries to end the eight-month war.

RBA raises cash rate to 4.85%

The Reserve Bank of Australia raised its official cash rate by 25 basis points to 4.85% on Tuesday, as widely expected. The move took borrowing costs to their highest level since December 2008. It brought total monetary tightening this year to 125 basis points across five rate hikes. A relatively narrow 6-3 vote suggested policymakers could be approaching the end of their tightening cycle.

The Australian dollar fell as much as 0.35% to $0.6973 against the US dollar after the decision. The New Zealand dollar remained unchanged at $0.5616. StoneX senior markets analyst Matt Simpson said the rate increase had already been priced into the market. He said the three dissenting votes suggested declining appetite for further tightening.

Other central banks scheduled to announce monetary policy decisions this week include those of Britain, Norway and Sweden.

Yuan slides after PBOC move

China's offshore yuan was heading for its biggest single-day decline since May. It fell 0.36% to 6.671 per dollar. The sharp decline followed an announcement by the People's Bank of China that it would increase the foreign exchange reserve requirement ratio. The move is expected to tighten dollar liquidity conditions and slow the yuan's recent appreciation.