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

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

That followed US 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.

Tensions around US midterm elections meanwhile loom large, and an AI-driven stock market slump showed little sign of slowing, hurting risk sentiment and lending some support to the dollar.

The dollar index, which measures the currency against a basket of currencies that includes the yen and the euro, traded a shade weaker at 101.72, after Monday's drop to a one-month low.

"Oil relief is growing, but conviction elsewhere remains thin," Sim Moh Siong, 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."

The euro was 0.1% stronger at $1.1195 as the dollar ticked lower. The Japanese yen fetched 157.81 per dollar, remaining largely flat during a domestic holiday.

Elsewhere, China's offshore yuan was on track for its biggest single-day decline since May, last down 0.36% at 6.671 per dollar.

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

ANOTHER ROUND OF CENTRAL BANK MEETS

The Reserve Bank of Australia raised the official cash rate 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, while a surprisingly narrow 6-3 vote signalled policymakers may be nearing the end of their tightening campaign.

The Australian dollar declined as much as 0.35% to a low of $0.6973 per US dollar after the rate decision. The kiwi 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 Australian dollar's decline.

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

Sterling was a touch stronger at $1.3417. 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. - Reuters