China will ask the World Trade Organization (WTO) next week for permission to impose sanctions on the United States, for Washington's non-compliance with a ruling in a dispute over US dumping duties.

Anxiety over the trade dispute between the world's two biggest economies outweighed traders' optimism about a possible agreement on the terms of Britain's exit from the European Union and reversed some of euro and sterling's gains on Monday.

The Australian dollar was another casualty of the trade tension between Beijing and Washington, tumbling to its weakest level against the greenback since February 2016.

"The dollar index is in positive territory this morning with the Aussie caught in the crossfire of trade spat between the US and China," Viash Sreemuntoo, corporate trader at XE said in a research note. "Investors continue to take a cautious approach amidst trade war headlines."

At 10:27 a.m. (1427 GMT), the dollar index that tracks the greenback against six major currencies was up 0.06 percent at 95.210. It shed over 0.2 percent on Monday as the euro and sterling bounced after the European Union chief negotiator Michel Barnier hinted at a possible Brexit deal.

The euro was buoyed by a decline in Italian government borrowing costs after Economy Minister Giovanni Tria on Monday predicted that yields would drop as the government lays out its eagerly awaited 2019 budget.

The euro initially rose 0.4 percent to $1.16445

before turning lower in early US trading. It later pared those losses to be little changed on the day at $1.15940 following a German magazine Der Spiegel report that said the executives of Deutsche Bank and Commerzbank were growing more open to the idea of a merger.

Sterling touched a five-week high against the dollar earlier Tuesday before fading to $1.2989, down 0.3 percent on the day, according to Reuters data.

The Australian dollar was down 0.26 percent to $0.70940 after hitting its lowest since February 2016 on concerns that potential damage to the Chinese economy from a trade war would hurt Australia's exporters.

The New Zealand dollar also hovered near a 2-1/2 year low at $0.6505. China's offshore yuan fell 0.2 percent to 6.8673, a 2-1/2 week low.