The dollar maintained its gains on Tuesday, at a time when positive economic data and a shift in expectations regarding Federal Reserve policy outweighed fears of another U.S. government shutdown.

The dollar index

The Australian dollar surged after the Reserve Bank of Australia announced its first rate hike in two years. The yen remained stable after two days of declines, while Japan's finance minister downplayed the prime minister's comments on the benefits of a weak currency.

The dollar is in a stronger position following the nomination of Kevin Warsh as a candidate for the next president of the Federal Reserve and after data on US manufacturing showed a return to growth.

The stalemate in Washington will delay the release of an important employment data point on Friday, but geopolitical tension has eased after the United States reached a trade agreement with India and announced that nuclear talks with Iran will resume.

"The dynamics have raised hopes that the growth of the US is expanding," wrote Kyle Rodda, a market analyst at Capital.com, in a note about US factory data. "The data also boosted the US dollar, adding to the rally that began on Friday after Trump selected Kevin Warsh."

The dollar has experienced a rise since the US President, Donald Trump, nominated Warsh as the next president of the Federal Reserve, amid expectations that he will be less prone to push for rapid interest rate cuts than other candidates.

On Monday, Trump announced a trade agreement with India that reduces tariffs on Indian products in exchange for India halting purchases of Russian oil and reducing trade barriers. On the geopolitical front, Iran and the United States are expected to resume nuclear talks on Friday in Turkey, and Trump has warned that bad things are likely to happen if an agreement is not reached.

"The story of India is interesting, but it really is about the idea that the tension between the United States and Iran seems to be decreasing, and all this pressure and threats imposed by President Trump have brought Iran to the negotiating table," said Rodrigo Catril, currency strategist at National Australia Bank, in a podcast.

The Institute for Supply Management said on Monday that its manufacturing PMI rose to 52.6 last month, the highest reading since August 2022. However, the anticipated employment data for the United States for January will not be published this week due to the partial shutdown of the federal administration.

The Reserve Bank of Australia raised its official interest rate by 25 basis points to 3.85%, thus restarting a cycle of increases after three cuts last year. The Australian dollar advanced significantly, as the central bank's warnings about inflation fueled bets that there would be at least one more hike this year.

Both the European Central Bank and the Bank of England are expected to keep interest rates unchanged when they release their latest decisions on Thursday.

The Australian dollar AUDUSD rose by 0.9% to 0.7007 dollars, and by 1.1% to 108.85 yen AUDJPY, nearing its record high. The New Zealand kiwi NZDUSD strengthened by 0.6% to 0.6033 dollars, while the British pound GBPUSD rose by 0.2% to 1.3693 dollars.