The dollar traded modestly lower on Tuesday as currency markets weighed a partial rebound in crude prices, lingering US-Iran hostilities and anxiety ahead of US midterm elections, while the Australian dollar slid after the Reserve Bank of Australia delivered a widely anticipated rate increase.
The dollar index, which tracks the greenback against a basket of peers including the yen and the euro, was last at 101.72, a touch softer after touching a one-month low in the prior session. The euro firmed 0.1% to $1.1195, and the yen held near 157.81 per dollar during a Japanese market holiday.
Oil recovered some ground after Monday's sharp selloff. Brent crude futures rose 0.5% to $105.25 a barrel in Asian trading, clawing back part of a more than 7% plunge that followed US strikes on Iran's Qeshm Island. The attack undercut earlier optimism about talks aimed at ending the eight-month conflict.
"Oil relief is growing, but conviction elsewhere remains thin," Sim Moh Siong, an FX strategist at OCBC, said in a note. "Cheaper energy is reshaping FX dynamics, while AI concerns and US election risks reinforce our view that the USD remains supported."
A deepening slump in AI-linked equities has sapped risk appetite, a development that typically lends the dollar support as a safe-haven asset, while the approach of US midterm elections has added to caution across markets.
In Asia, the offshore yuan was headed for its steepest one-day decline since May, falling 0.36% to 6.671 per dollar. The move followed the People's Bank of China's decision to lift the foreign exchange reserve requirement ratio, a step that tightens dollar liquidity conditions and slows the recent pace of yuan appreciation.
The Reserve Bank of Australia raised its official cash rate by 25 basis points to 4.85%, the highest level since December 2008, in line with expectations. The increase brings total tightening this year across five moves to 125 basis points. A surprisingly narrow 6-3 vote suggested policymakers may be approaching the end of the current campaign.
The Australian dollar fell as much as 0.35% to a low of $0.6973 after the decision. The New Zealand dollar was flat at $0.5616.
"Their hike was priced in... and we're already seeing a loss of appetite to hike with three dissenters," said Matt Simpson, senior markets analyst at StoneX, explaining the currency's decline.
Note: Levels as of Tuesday in Asian trading.
Sterling edged up 0.05% to $1.3417 after the latest PMI data showed British manufacturers began the final quarter of 2026 with their strongest output growth in more than two years. Economists surveyed by Reuters expect the Bank of England to raise its bank rate to 4.0% from 3.75%, the first increase since August 2023, when inflation was still more than triple the 2% target. The BOE is one of several central banks due to issue policy statements this week, alongside Norway and Sweden.
For currency investors, the picture is one of competing forces: cheaper energy would normally erode the dollar's inflation-hedge appeal, but the combination of an AI-driven equity selloff, election uncertainty and a still-hawkish RBA keeps the greenback broadly supported. The narrow Australian vote is likely to sharpen focus on whether the RBA's tightening cycle is nearing its peak, a question that could cap further gains in the Aussie.