FOREX-Dollar firms vs yen, but broad rally losing steam

By Laura Matthews and Sophie Kiderlin

NEW YORK/LONDON, Feb 3 (Reuters) - The dollar strengthened against the yen on Tuesday but was backing away from a third consecutive day of broad gains even as positive economic data and shifting expectations for Federal Reserve policy outweighed concerns about another U.S. government shutdown.

The greenback was on a stronger footing in recent days following Kevin Warsh's nomination by President Donald Trump as the next Fed chief, as markets broadly expect him to be less likely to press for rapid rate cuts than other candidates.

Investors were hoping Tuesday's job openings data and the closely watched U.S. jobs report for January, expected later this week, would shed more light on how U.S. economic conditions are evolving, and what it would mean for further interest-rate cuts this year.

However, those releases have been delayed because of a partial shutdown of the federal government.

"Obviously, we want to look at labor because it's going to matter tremendously to federal decision-making, which right now seems up in the air," said Juan Perez, director of trading, Monex USA in Washington.

The dollar index =USD, which measures the greenback against a basket of currencies, was 0.08% lower at 97.45 and retreating from a two-day 1.5% advance. The euro EUR= rose 0.13% to $1.1806.

FED RATE CUTS STILL EXPECTED

Richmond Fed President Tom Barkin said on Tuesday that rate cuts so far have helped the job market as the Fed tackles "the last mile" of bringing inflation down to 2%.

Barkin added that rising productivity is helping businesses cut costs and easing inflation, but it is unclear how long that will last and how monetary policy might need to respond.

"We have not seen any major shift in Fed policy expectations after the nomination of Warsh," said Shaun Osborne, chief FX strategist at Scotiabank in Toronto. "It seems more than likely that a Warsh Fed will cut rates more aggressively than what we have had priced in for the (Jerome) Powell Fed."

Meanwhile, U.S. manufacturing data showed a return to growth, with the Institute for Supply Management saying on Monday that its manufacturing PMI rebounded to 52.6 last month, the highest reading since August 2022.

Elsewhere, geopolitical tensions cooled as the United States reached a trade deal with India and said nuclear talks would resume with Iran.

AUSTRALIAN DOLLAR SURGES

The Aussie surged after the Reserve Bank of Australia delivered its first rate increase in two years, lifting its cash rate by 25 basis points to 3.85%. The central bank also warned about inflation, stoking bets that there would be at least one more increase this year.

The Australian dollar AUD= was up 0.81% to $0.7004. It rose to its highest level against the yen since 1990, and was last up more than 1.5% to 109.31 yen AUDJPY=.

Both the European Central Bank and the Bank of England are expected to keep policy rates on hold when they meet on Thursday. Markets will watch closely for any hints from the ECB on whether recent euro strength could influence policy-making going forward.

Later in the week, Japan's lower house election will come into focus.

Investors have sold the yen and Japanese government bonds in the run-up to the 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 United States in coordinated action to defend their currency.

The dollar was last up 0.14% against the Japanese currency at 155.82 yen JPY=EBS, but remained below the 1-1/2-year high of 159.45 yen hit in mid-January.

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 0.95% to $77,705.91, while ether ETH= declined 2.1% to $2,291.31.