The euro tumbled 0.9 per cent against the dollar to $1.0325 , its weakest since December 2002. Versus the Swiss franc, it dropped 0.7 per centto 0.9941 francs, its lowest since 2015.

"It will continue to be very difficult for the euro to rally in any meaningful way with the energy picture worsening and risks to economic growth increasing notably," said Derek Halpenny, an analyst at MUFG.

Survey data showed business growth across the euro zone slowed further last month and forward-looking indicators suggested the region could slip into decline this quarter as the cost of living crisis keeps consumers wary.

The dollar index gained 0.8 per cent to 105.98, a new two-decade high for the currency.

Elsewhere, stock markets gave up early gains on Tuesday as the latest surge in natural gas prices rattled sentiment, offsetting earlier optimism about signs of easing US-China trade tensions.

Australia's central bank became the latest to extend its interest rate tightening cycle, hiking by a second straight 50 basis points, although the Aussie dollar fell 0.8 per cent as investors interpreted the bank's accompanying messaging to be more dovish than expected.

With US markets closed on Monday, trading is expected to be livelier on Tuesday and Wall Street reversed early gains and headed lower by 0825 GMT .

Offering brief respite to nervous markets was a report that US President Joe Biden was leaning towards a decision on easing tariffs on goods from China as well as news Chinese Vice Premier Liu He had spoken to US Treasury Secretary Janet Yellen.

A survey showing China's services activity grew at the fastest pace in almost a year also helped sentiment.

But as European trading picked up, the Euro STOXX reversed course and was last down 0.43 per cent while Germany's DAX fell 0.6 per cent. The FTSE 100 dropped 1.05 per cent.

In Asia, MSCI's gauge of Asia Pacific stocks outside Japan rose 0.17 per cent.

Tuesday offers little in the way of key economic data but later this week both the US Federal Reserve and European Central Bank release their minutes from recent policy meetings and on Friday widely watched US payrolls data are published.

Redmond Wong,market strategist, Greater China, at Saxo Markets Hong Kong, said traders would continue to watch closely the trajectory for inflation and growth in major markets.

"Market participants are still assessing the impact of the tug of war between inflation being at persistently elevated levels and signs pointing to potentially an incoming US recession," he said.

Those concerns were front and centre in South Korea, where June inflation accelerated to its fastest since the Asian financial crisis, fanning expectations the central bank could deliver a 50 basis point rake rise for the first time next week to cool prices.

U.S. treasury yields returned from the holiday marginally higher, with the yield on benchmark 10 year notes at 2.93 per cent but failing to push back above the symbolic 3 per cent level.

Euro zone government bond yields fell on uncertainty about the future path of monetary tightening by the European Central Bank and as investors fearful of the economic outlook sought safety.

Brent crude futures rose 0.2 per cent to $113.8 a barrel, while US crude oil increased 1.73 per cent to 110.31 a barrel. Spot gold dropped 0.29 per cent to $1804 an ounce.

Australian Associated Press