The US dollar traded broadly steady on Tuesday, as positive economic data and shifting expectations for Federal Reserve monetary policy outweighed concerns about the possibility of another US government shutdown.

The US Dollar Index, which measures the currency against a basket of peers, held relatively stable at 97.53 after rising 1.5% over the past two days. The euro rose 0.12% to $1.1804.

The dollar had gained stronger momentum in recent days after the nomination of Kevin Warsh to lead the Federal Reserve, as markets generally expect him to be less inclined toward pushing for rapid rate cuts compared with other potential candidates.

Rate Cut Expectations Remain in Place

Lee Hardman, senior currency analyst at MUFG, said Warshs nomination sent a signal that US President Donald Trump is not seeking to undermine the Feds independence in setting monetary policy. However, he added that Warsh is still likely to support lower interest rates, at least in the initial phase.

He said, We believe that once the dust settles, the dollar will return to weakening, and we expect EUR/USD to move back above 1.20 later this year, as the Fed begins cutting rates while the European Central Bank keeps rates unchanged.

Meanwhile, US manufacturing data showed activity returning to growth, with the ISM reporting on Monday that the manufacturing PMI rose to 52.6 last month, the highest level since August 2022.

However, the closely watched US January jobs report will not be released this week due to the partial federal government shutdown.

Elsewhere, geopolitical tensions eased after the United States reached a trade agreement with India and announced the resumption of nuclear talks with Iran.

Australian Dollar Jumps

The Australian dollar surged after the Reserve Bank of Australia delivered its first interest rate hike in two years, raising the benchmark rate by 25 basis points to 3.85%. The bank also warned about inflation risks, reinforcing bets on at least one additional hike this year.

The Australian dollar rose 0.96% to $0.7014, and climbed more than 1.5% against the Japanese yen to 109.48, its highest level versus the yen since 1990.

Both the European Central Bank and the Bank of England are expected to keep interest rates unchanged at their meetings on Thursday. Markets will closely watch any signals from the ECB on whether the euros recent strength could influence future policy direction.

Later this week, attention will turn to Japans lower house elections.

Investors have been selling the Japanese yen and government bonds ahead of the February 8 vote, on bets that a strong result for Prime Minister Sanae Takaichis party would give it greater room to expand fiscal stimulus.

The yen received some support last week after Japanese policymakers hinted at possible coordination with the United States on joint action to defend the currency.

The dollar was steady against the yen at 155.67, down from a one-and-a-half-year high of 159.45 reached in mid-January.

Matthew Ryan, head of market strategy at Ebury, said, The outcome of this weeks election will be crucial, as a strong showing by Takaichi could push the yen back toward the 160 level.

Finance Minister Satsuki Katayama on Tuesday defended Takaichis recent remarks highlighting the benefits of a weaker yen, saying the prime minister was referring to what is written in textbooks.