Dollar Supported by Geopolitical and Market Uncertainty

The US dollar remained on relatively firm footing on Tuesday as currency markets assessed renewed Middle East tensions, uncertainty surrounding US-Iran negotiations and risks ahead of the US midterm elections.

The dollar index, which measures the greenback against a basket of major currencies including the euro and Japanese yen, traded slightly higher at 101.81 after falling to a one-month low on Monday.

Oil prices also recovered some ground during early Asian trading. Brent crude futures rose 0.5% to $105.25 per barrel, partially reversing Monday’s decline of more than 7%.

The recovery followed reported US defensive strikes on Iran’s Qeshm Island, which weakened earlier optimism surrounding diplomatic discussions aimed at ending the eight-month conflict.

An ongoing selloff in AI-related stocks also weighed on risk sentiment, providing additional support for the dollar as investors reassessed exposure to risk-sensitive assets.

OCBC FX strategist Sim Moh Siong noted that changing energy prices, concerns surrounding artificial intelligence and US election risks were contributing to the currency’s underlying support.

Australian Dollar Declines After RBA Tightening

The Australian dollar weakened despite the Reserve Bank of Australia delivering the widely anticipated interest rate increase.

The RBA raised its official cash rate by 25 basis points to 4.85%, its highest level since December 2008. The decision brought total monetary tightening this year to 125 basis points across five increases.

The move followed concerns about persistent inflation. Policymakers had highlighted upside risks to core inflation, which stood at 3.7%, above the central bank’s target range of 2% to 3%.

Investors had positioned heavily for the increase ahead of the announcement. Following the decision, the Australian dollar declined as much as 0.35% to $0.6974 against the US dollar.

The market reaction indicates that the expected rate increase had largely been reflected in currency positioning before the announcement.

Chinese Yuan Weakens Following PBOC Reserve Requirement Change

China’s offshore yuan was on track for its largest single-day decline since May after weakening as much as 0.34% to 6.67 per dollar.

The move followed the People’s Bank of China’s decision to increase the foreign exchange reserve requirement ratio.

The adjustment is intended to tighten dollar liquidity conditions and slow the pace of recent yuan appreciation. The announcement therefore introduced another source of movement in Asian foreign exchange markets.

Elsewhere, the euro remained broadly unchanged at $1.1182, while the Japanese yen traded at 157.92 per dollar during a domestic holiday.

The New Zealand dollar was also little changed at $0.5616.

European Central Banks Prepare for Policy Decisions

Currency markets are also preparing for monetary policy announcements from several European central banks, including those in Britain, Norway and Sweden.

Sterling traded relatively steadily at $1.3401 following data showing that British manufacturers began the final quarter of 2026 with their strongest output growth in more than two years.

Attention is also turning toward the Bank of England. Economists surveyed by Reuters expect the central bank to increase its bank rate to 4.0% from 3.75%.

Such a move would represent the first rate increase since August 2023, when inflation remained more than three times the central bank’s 2% target.

What Investors Should Watch Next

Foreign exchange markets will remain sensitive to developments in the Middle East, particularly whether diplomatic discussions between Washington and Tehran can regain momentum or military tensions intensify.

Central bank decisions will provide another important source of volatility. The RBA’s latest increase demonstrates that inflation concerns remain influential in monetary policy, while expectations surrounding the Bank of England could affect sterling positioning.

Investors will also monitor China’s currency policy and the impact of tighter dollar liquidity conditions on the offshore yuan. Meanwhile, continued volatility in AI-related equities and uncertainty surrounding US elections may sustain demand for defensive currency exposure.