Dollar under pressure as oil prices slump, Australia rate decision awaited

The dollar experienced fluctuations alongside oil prices on Tuesday, as hopes for a US-Iran diplomatic resolution persisted, while the Australian dollar remained stable pending the Reserve Bank of Australia's rate decision. Brent crude futures experienced a sharp decline of over 7% on Monday, marking the steepest single-day drop in months, following Iran's assertion that US-Iranian talks to end their eight-month conflict were ongoing.

Falling energy prices alleviated inflation concerns and depressed longer-dated US Treasury yields. The yield on the benchmark 10-year Treasury note remained steady at 4.9145%, and the 30-year bond yield was also flat at 5.2868%. The dollar index, which gauges the currency against a basket of currencies, including the yen and euro, ended slightly weaker at 101.76 after reaching a one-month low on Monday.

AI-driven stock market downturns continued to dampen risk sentiment, providing partial support for the dollar. Tensions surrounding US midterm elections also weighed on investors, bolstering the dollar as a potential safe-haven asset. Sim Moh Siong, FX strategist at OCBC, noted that while oil stabilization is occurring, confidence outside of this sector remains limited.

The euro saw a marginal increase to $1.1185 due to the dollar's weakness. Meanwhile, the Japanese yen held steady at 157.915 per dollar during a local holiday. Various central banks announced policy statements that week, with the Reserve Bank of Australia expected to hike the official cash rate by 25 basis points to 4.85%, the highest level in nearly two decades.

This would be the fifth increase in 2026, totaling a 125 basis points tightening. The Australian dollar remained relatively unchanged at $0.7002, while the New Zealand dollar was flat at $0.5617. The British pound strengthened by 0.05% to $1.3414 after indicating that British manufacturers had recorded the strongest output growth in over two years in the final quarter of 2026.

Economists surveyed by Reuters anticipate the Bank of England to raise its Bank Rate to 4.0% from 3.75%, the first increase since August 2023, when inflation was more than triple the 2% target.