FOREX-US dollar eases as recent rally loses steam

By Laura Matthews

NEW YORK, Feb 3 (Reuters) - The U.S. dollar fell against most major currencies except the yen on Tuesday, as traders consolidated recent gains fueled by upbeat U.S. data and expectations of a less dovish Federal Reserve, while concerns about another government shutdown weighed on sentiment.

The U.S. House of Representatives approved a bipartisan deal Tuesday to end the partial shutdown.

The greenback had been 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 hoped Tuesday's job openings data and this week's January jobs report would offer clearer signals on the U.S. economy, and whether more interest-rate cuts are likely. However, those releases were delayed because of the partial shutdown.

"There definitely is a somewhat anti-dollar, anti-Treasury type of theme that is in the market, and I think we're trading around that theme at this point," said Marvin Loh, senior global market strategist at State Street in Boston. He later pointed to the buck's failure to draw a safety bid as markets turn a bit more risk-off.

The dollar index =USD, which measures the greenback against a basket of currencies, was 0.12% lower at 97.42 and retreating from a two-day 1.5% advance. The euro EUR= rose 0.21% to $1.1815.

FED RATE CUTS STILL EXPECTED

Richmond Fed President Tom Barkin said on Tuesday that rate cuts have helped the job market as the Fed tackles "the last mile" on inflation.

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.

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.

"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."

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= rose 0.89% to $0.7009. 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 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 U.S. in coordinated action to defend their currency.

The dollar was last up 0.11% against the Japanese currency at 155.77 yen JPY=EBS, but remained below the 1-1/2-year high of 159.45 yen hit in mid-January.

"The market fears a looser fiscal stance by the PM after the election," said Jane Foley, head of FX strategy at Rabobank London. "The MoF will be watching but its influence may be diminished in the wake of Trump-like remarks from the PM regarding the benefits of a weaker JPY for exporters."

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= hit its lowest since November 2024 and was last down 4.55% at $74,880.91, while ether ETH= declined 6.01% to $2,199.90.