Currency Divergence 2026: Aussie Dollar Reclaims $0.70 Handle as RBA Defies Global Trend

GLOBAL MARKETS — The U.S. Dollar’s aggressive two-day rally took a breather on Wednesday, February 4, 2026. After surging 1.5% following the nomination of Kevin Warsh as the next Fed Chair, the Dollar Index (DXY) retreated 0.2% to 97.42, eclipsed by a hawkish bombshell from the Land Down Under.

1. The RBA’s Bold Move: First Hike of 2026

In a move that caught many off-guard, the Reserve Bank of Australia (RBA) raised its official cash rate by 25 basis points to 3.85%.

• Market Reaction: The AUD/USD pair skyrocketed 1%, reclaiming the critical 0.7018 level.

• The Justification: RBA Governor Michele Bullock cited a "resurgence in inflation" in late 2025, with core inflation stubbornly staying above the 2-3% target band. Analysts now expect the RBA cash rate to stay higher than the US Fed funds rate for the first time in six years.

2. The "Warsh Effect" vs. Manufacturing Strength

While the dollar slipped today, its underlying fundamentals remain robust:

• Nomination Impact: Markets are still pricing in a "less dovish" Fed under Kevin Warsh, who is expected to prioritize shrinking the Fed’s massive balance sheet.

• Economic Resilience: The ISM Manufacturing Index surged to 52.6 in January—its strongest reading since mid-2022—confirming that the U.S. industrial sector has officially returned to expansion.

3. Washington Watch: Shutdown Ends, Data Resumes

The brief, four-day partial government shutdown ended Tuesday after President Trump signed a $1.2 trillion funding bill.

• Delayed Data: While the Non-Farm Payrolls (NFP) report for January was originally postponed, it is now expected to be released next week, providing the next major catalyst for the greenback.