FOREX-Dollar holds gains on economic data, Fed bets; Aussie jumps on RBA hike

By Rocky Swift

TOKYO, Feb 3 (Reuters) - The dollar held its gains on Tuesday as positive economic readings and shifting expectations for Federal Reserve policy outweighed concerns about another U.S. government shutdown.

The dollar index =USD, which measures the greenback against a basket of currencies, edged 0.1% lower to 97.46 after a two-day 1.5% advance. The euro EUR= was up 0.2% at $1.1808, and the yen JPY= tacked on 0.1% to 155.43 per dollar.

The Aussie surged after the Reserve Bank of Australia delivered its first rate increase in two years. The yen was steady after a two-day slide as the country's finance minister played down comments from the premier on the benefits of a weak currency.

The greenback is on a stronger footing following Kevin Warsh's nomination as the next Fed chief and after U.S. manufacturing data showed a return to growth. An impasse in Washington will delay a key labour report on Friday, but geopolitical tensions ratcheted down as the U.S. reached a trade deal with India and said nuclear talks will resume with Iran.

"The dynamic has lifted hopes that the U.S. growth story is broadening out," Kyle Rodda, a senior market analyst at Capital.com, wrote in a note about the U.S. factory report. "The data also boosted the U.S. dollar, which added to the bounce that began on Friday after Trump's selection of Kevin Warsh."

The dollar has been on an upswing since U.S. President Donald Trump nominated Warsh as the next Fed chair on expectations he will be less likely to press for rapid rate cuts than some other candidates.

On Monday, Trump unveiled a trade deal with India that slashes tariffs on Indian goods in exchange for India halting Russian oil purchases and lowering trade barriers. On the geopolitical front, Iran and the U.S. are due to resume nuclear talks on Friday in Turkey, with Trump warning that bad things would probably happen if a deal could not be reached.

"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," Rodrigo Catril, a currency strategist at National Australia Bank, said on a podcast.

The Institute for Supply Management said on Monday its manufacturing PMI rebounded to 52.6 last month, the highest reading since August 2022. But a closely watched U.S. jobs report for January will not be released this week because of a partial shutdown of the federal government.

The RBA lifted its cash rate by 25 basis points to 3.85%, restarting a hiking cycle after three cuts last year. The Aussie moved sharply higher as the central bank's warnings about inflation stoked bets that there would be at least one more increase this year.

Both the European Central Bank and the Bank of England are expected to keep policy rates on hold when they release their latest decisions on Thursday.

The Australian dollar AUD= jumped 0.9% to $0.7007 and 1.1% to 108.85 yen AUDJPY=, on the brink of a record high. New Zealand's kiwi NZD= strengthened 0.6% to $0.6033, while sterling GBP= rose 0.2% to $1.3693.

Investors have sold the yen and Japanese government bonds in the run-up to a lower house election on February 8 on bets that a strong showing for Prime Minister Sanae Takaichi's party would give her a free hand to expand stimulus. The yen got a respite last week after Japanese policymakers hinted at joining with the U.S. in coordinated action to defend 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, head of market strategy at Ebury. "It will be interesting to see whether this is enough to trigger the physical selling of FX reserves from Japan, as verbal intervention tends to have nothing more than a temporary impact."

Finance Minister Satsuki Katayama on Tuesday defended Takaichi's recent comments highlighting the benefits of a weaker yen, stating that the premier had referenced "what is written in textbooks."

In cryptocurrencies, bitcoin BTC= fell 0.6% to $77,955.57, while ether ETH= declined 1.8% to $2,300.74.