By Peter Nurse

- The U.S. dollar edged lower in early European trade Tuesday, while the Australian dollar dipped despite the country's Reserve Bank announcing a half-point rate hike.

At 3 AM ET (0700 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, edged 0.1% lower to 104.892, after climbing as high as 105.64 on Friday, close to the two-decade peak of 105.79 reached in mid-June.

Risk sentiment has been on the rise Tuesday, with stock markets generally higher, and this has weighed on the safe-haven dollar. That said, losses are limited given a strong rebound in the 10-year Treasury yield, which last traded at 2.937% from the lowest since May at 2.791% on Friday.

There was no trading in Treasurys on Monday, with U.S. markets closed for the Fourth of July holiday, which also limited activity in the foreign exchange markets.

Elsewhere, AUD/USD fell 0.1% to 0.6858 after the Reserve Bank of Australia hiked its key interest rate by 50 basis points. While this move was widely expected, the U.S. Federal Reserve's 75 basis point increase last month had fueled speculation that Australia’s central bank might be more aggressive in its tightening.

“Despite this, the Aussie dollar has been largely de-linked from monetary policy and short-term rate dynamics, while remaining primarily driven by USD moves and the global risk environment,” said analysts at ING, in a note.

“We think that a return to and above 0.7000 in AUD/USD will require quite a material stabilisation/recovery in global risk sentiment, and may only materialise in 4Q.”

EUR/USD rose 0.2% to 1.0439, ahead of the release of the final June PMI data from the Eurozone, which should show a slowing of activity in the region.

The European Central Bank is gearing up to raise interest rates for the first time in a decade later this month and traders are awaiting the release of the minutes from the June meeting on Thursday for further clues about future monetary policy.

“We think the pair runs a bigger risk of re-testing the 1.0380 May lows in the coming days rather than returning to the 1.0500-1.0600 area, given the still unstable global risk environment,” ING added.

GBP/USD traded 0.1% higher at 1.2115, while USD/JPY rose 0.4% to 136.25, with the yen hurt by the rising U.S. yields, sliding back toward a 24-year low to the greenback.

USD/CNY fell 0.1% to 6.6942, with the yuan supported by the news that China’s services activity grew at the fastest rate in June in almost a year as COVID curbs eased and demand revived.

The Caixin services purchasing managers’ index rose to 54.5 in June, indicating the fastest growth since July last year and the first expansion since February.