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NEW YORK: The dollar edged higher on Tuesday against a basket of peer currencies after US manufacturing data showed a stronger-than-expected pickup in activity, even as labor shortages and a lack of raw materials weighed on production.

The Institute for Supply Management (ISM) said its index of US manufacturing activity rose in May as pent-up demand amid a reopening economy boosted orders.

The dollar initially traded lower on the report, in which ISM said manufacturing's growth potential continued to be hampered by worker absenteeism and temporary shutdowns because of shortages of parts and labor.

The report suggests that supply issues in the manufacturing sector are having an impact on the economy as a whole, said Kathy Lien, managing director at BK Asset Management.

"It's also telling us that the momentum that we saw in the beginning of the second quarter could be beginning to slow."

The dollar index crept up 0.35% to 89.822, but was well off Friday's high of 90.447, when a measure of US inflation closely watched by the Federal Reserve posted its biggest annual rise since 1992.

The market bias is generally toward a softer dollar, said Vassili Serebriakov, FX and macro strategist at UBS.

"The global recovery outside of the US that was lagging in the first quarter because of the slow pace of vaccinations has now picked up, particularly in places like the euro zone and the UK," he said of recent dollar weakness.

Hawkish signals from the central banks of some G10 countries, including Canada, Norway and New Zealand, have also added pressure to the greenback, he said.

Britain's pound touched a three-year high of $1.425 during the Asian session, helped by remarks from a Bank of England policymaker last week pointing to a rate hike next year or sooner.

The euro ticked up 0.05% to $1.2305, following data that showed euro zone inflation surged past the European Central Bank's target in May.

"The next quarter's worth of inflation data is completely riddled with base effects and other temporary factors, so it's very hard for markets and policymakers to strip out the signal from that noise," said Simon Harvey, FX analyst at Monex Europe.

Commodity-linked currencies were generally stronger versus the dollar as oil prices rose on expectations for growing fuel demand.

The Organization of the Petroleum Exporting Countries and allies - known collectively as OPEC+ - agreed on Tuesday to stick to the existing pace of gradually easing oil supply curbs, as producers balanced anticipation of a recovery in demand against a possible increase in Iranian supply.

The Canadian dollar reached a six-year high of 1.2010 per greenback, helped by the strength in oil, and data that showed Canada's economic growth in the first quarter remained robust.

The Australian dollar was up 0.45% at 0.77625.

Australia's central bank left its cash rate at record lows and reiterated its lower-for-longer policy stance, even as data showed the country's output was above its pre-pandemic level.

China's yuan was steady after authorities ordered banks to increase their foreign exchange reserve ratio, a move seen as an attempt to limit the fast appreciation of the yuan.

The offshore yuan was at 6.3817, up 0.11% on the day.

In cryptocurrencies, bitcoin was down 2.66% at $36,348.78, while ether fell 1.21% to $2,566.90.

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