FOREX-Dollar edges higher on Fed bets and data; Aussie jumps on RBA hike

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Dollar extends gains into third consecutive day

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Aussie surges on RBA's inflation warnings

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Yen traders focus on Japan election

(Updates pricing after European morning)

By Sophie Kiderlin and Rocky Swift

LONDON, Feb 3 (Reuters) - The dollar inched higher on Tuesday, rising for a third consecutive day as positive economic data and shifting expectations for Federal Reserve policy outweighed concerns about another U.S. government shutdown.

The dollar index, which measures the greenback against a basket of currencies, was last slightly higher ?at 97.62, extending a two-day 1.5% advance. The euro was little changed at $1.1791.

The greenback has been on a stronger footing in recent days following Kevin Warsh's nomination as the next Fed ?chief, as markets broadly expect him to be less likely to press for rapid rate cuts than other candidates.

FED RATE CUTS ?STILL EXPECTED

Warsh's nomination also signalled that U.S. President Donald Trump was not looking to take ?away the Fed's power over policy setting, ?said Lee Hardman, senior currency analyst at MUFG. But, he noted, Warsh was also likely to "at least initially support lower rates".

"We think when the dust settles, the dollar ?will re-weaken and we expect the euro-dollar to rise back above the ?1.20 level later this year as the Fed cuts rates and the ECB keeps rates on a hold."

U.S. manufacturing data, meanwhile, showed a return to growth, with the Institute for Supply Management saying on Monday that its ?manufacturing PMI rebounded to 52.6 last month, the highest reading since ?August 2022.

The closely ?watched U.S. jobs report for January, however, will not be released this week because of a partial shutdown of the federal government.

Elsewhere, geopolitical tensions cooled as the U.S. reached a trade deal with India and said nuclear talks ?would resume with Iran.

AUSTRALIAN DOLLAR SURGES

The Aussie surged after the Reserve Bank of Australia delivered its first rate increase in two years, lifting its cash rate by 25 basis points to 3.85%. The central bank also warned about inflation, stoking bets that there would be at least one more increase this year.

The Australian dollar was last up around 0.8% at $0.7002. It rose to its highest level against the yen since 1990, and was last up more than 1.5% to 109.31 yen.

Both the European Central Bank and the ?Bank of England ?are expected to keep policy rates on hold when they meet on Thursday. Markets will watch closely for any hints from the ECB on whether recent euro strength could influence policy-making going forward.

Later in the week, Japan's lower house ?election will come into focus.

Investors have sold the yen and Japanese government bonds in the run-up to the election on February 8 on bets that a strong showing for Prime Minister Sanae Takaichi's party would give her a free hand to expand stimulus.

The yen got a respite last week after Japanese policymakers hinted at joining with the U.S. in coordinated action to defend their currency.

The dollar was last up 0.2% against the Japanese currency at 155.93 yen, but remained below the 1-1/2-year high of 159.45 yen hit in mid-January.

"The outcome of this weekend's election will now be key, as a ?strong showing for Takaichi could push the yen back in the direction of the 160 level," said Matthew Ryan, head of market strategy at Ebury.

Finance Minister Satsuki Katayama on Tuesday defended Takaichi's recent comments highlighting the benefits of a weaker yen, stating that the premier had referenced "what is written in textbooks".

In cryptocurrencies, bitcoin fell 0.3% to $78,185.42, while ?ether declined 2.2% to $2,288.52. (Reporting by Sophie Kiderlin in London and Rocky Swift in Tokyo; Editing by Harry Robertson, Alex Richardson and Jan Harvey)