Dollar drifts on Mideast, midterm risks; Aussie dips after expected RBA hike

By Jiaxing Li

HONG KONG, Nov 3 (Reuters) - The dollar was on the defensive on Tuesday in markets cautious about US-Iran tension ahead of midterm elections, while the Aussie dipped after the Reserve Bank of Australia hiked rates as expected.

Oil prices crept higher in early Asian trade, with Brent crude futures up 0.5% at $105.25, recouping some of Monday's plunge of more than 7%.

That followed US "defensive" strikes on Iran's Qeshm Island, which blunted earlier optimism about talks between the two sides to find a way to end the eight-month war.

An AI-driven stock market slump showed little sign of slowing, hurting risk sentiment and lending some support to the dollar. Tension around US midterm elections also loom large, helping to prop up the dollar as a safe-haven play.

The dollar index , which measures the currency against a basket of currencies that includes the yen and the euro, traded a shade stronger at 101.81, after Monday's drop to a one-month low.

"Cheaper energy is reshaping FX dynamics, while AI concerns and US election risks reinforce our view that the USD remains supported," Sim Moh Siong, FX strategist at OCBC, said in a note.

Also contributing to dollar strength, China's offshore yuan was on track for its biggest single-day decline since May, after weakening as much as 0.34% to 6.67 per dollar.

The sharp move came the People's Bank of China said it would raise the foreign exchange reserve requirement ratio (RRR), which will tighten dollar liquidity conditions and slow the pace of recent yuan gains.

The euro was steady at $1.1182 as the dollar ticked higher. The Japanese yen fetched 157.92 per dollar, also largely flat during a domestic holiday.

ANOTHER ROUND OF CENTRAL BANK MEETS

Central banks scheduled to issue policy statements this week include those of Australia, Britain, Norway and Sweden.

The Reserve Bank of Australia raised the official cash rate AUCBIR=ECI by 25 basis points to 4.85% as expected on Tuesday, its highest level since December 2008. The move brought total tightening this year across five increases to 125 basis points.

Investors had wagered heavily on an increase, as policy makers had warned of upside risks to core inflation running at 3.7%, and well above the RBA's target range of 2% to 3%.

The Australian dollar declined as much as 0.35% to a low of $0.6974 per US dollar after the rate decision. The kiwi was flat at $0.5616.

Sterling was largely steady at $1.3401. The latest PMI data showed British manufacturers started the final quarter of 2026 with the strongest output growth in more than two years.

Economists polled by Reuters expect the Bank of England to raise its bank rate to 4.0% from 3.75%, the first hike since August 2023, when inflation was still more than triple its 2% target.