The dollar was largely weaker on Tuesday afternoon after a disappointing reading for the US service sector fuelled fears of a recession in the world's largest economy.

Against the Swiss franc, the dollar was priced at CHF0.9090 on Tuesday afternoon, down from CHF0.9112 at the same time on Monday. Versus the Japanese yen, the dollar was trading at JPY139.79 in London, lower against JPY140.16.

Data on Monday showed the seasonally adjusted final S&P Global US services purchasing managers index posted 54.9 points in May.

This was up from 53.6 points in April but slightly below an earlier flash estimate of 55.1 points.

Michael Hewson, chief market analyst at CMC Markets, said the numbers raised questions about the strength of the US economy, ahead of the US Federal Reserve's interest rate decision next week.

Markets see a 76% chance of the Fed holding interest rates steady next Wednesday, according to the CME FedWatch Tool.

"Between a chorus of Fed speakers coming out in favour of a pause and the middling US economic data of late, it's increasing difficult to see the Fed hiking interest rates this month unless next week's [consumer price inflation] report is truly elevated," commented Matthew Weller, global head of research at FOREX.com and City Index.

The US inflation reading is released on June 13, a day before the Fed's interest rate decision. According to FXStreet-cited consensus, the annual inflation rate is expected to cool to 4.2% in May from 4.9% in April.

The euro was changing hands at USD1.0672 on Tuesday afternoon London time, lower against USD1.0679 at the same time on Monday.

The European Central Bank will announce its own interest rate decision on June 15. Analysts at UBS expect the central bank to hike rates by 25 basis points, and said this move was "firmly priced in" by markets.

Versus the Australian dollar, the US currency was priced at AUD1.5037, down from AUD1.5142.

Australia's central bank hiked interest rates to an 11-year-high Tuesday and warned that further rises may be on the horizon to get surging prices under control.

The Reserve Bank of Australia lifted the key rate 25 basis points to 4.1%, its highest level since May 2012, with governor Philip Lowe saying inflation had "passed its peak" but was still stubbornly high.

Most analysts surveyed by Bloomberg had forecast officials to hold steady.

Chris Turner at ING said the RBA's move to restart its tightening cycle may throw "extra focus" on Wednesday's Bank of Canada meeting.

"A 25 basis point BoC rate hike tomorrow (now priced with a 43% probability) would probably cause ripples across core bond markets around the world and could keep the dollar bid on the view that the Fed might be closer to hiking than first thought," Turner said.

Against the Canadian loonie, the dollar traded at CAD1.3430, slightly lower against CAD1.3433.

The pound was quoted at USD1.2401 on Tuesday afternoon, up from USD1.2378 on Monday afternoon. Against the euro, sterling was trading at EUR1.1619, up from EUR1.1589.

The UK construction sector continued to grow as a whole in May, as order books and new business rose sharply, despite the ongoing deterioration in housebuilding.

On Tuesday, the latest S&P Global/CIPS construction purchasing managers' index rose to 51.6 points in May, from 51.1 in April.

Rising further above the 50-point mark that separates expansion from contraction, it shows growth in the UK's building sector sped up slightly over the month.

In contrast, the eurozone construction sector fell in May at the fastest rate in the year so far and remained firmly in contractionary territory.

The HCOB Eurozone construction PMI total activity index posted at 44.6 points, down from 45.2 in April.