The Japanese yen led other safe-haven assets higher on Friday after US air strikes on Baghdad airport killed a senior Iranian military official, stoking tensions in the Middle East and lifting the price of oil.
US Treasury bonds and gold rallied after an Iraqi militia spokesman told Reuters that Iranian Major-General Qassem Soleimani and Iraqi militia commander Abu Mahdi al-Muhandis were killed in the attack.
The Pentagon confirmed the attack, saying Soleimani was actively developing plans to attack Americans in Iraq and the Middle East.
"We are only into the third day of the new year, and a big fat dollop of geopolitical uncertainty has landed on investors' desks," said Jeffrey Halley, senior market analyst for Asia Pacific at broker OANDA.
"I am struggling to see how an Iranian riposte will not occur," he added. "Oil installations and tankers were my first thoughts."
The market seemed to agree with oil jumping around $2 a barrel. The dollar eased 0.4% to 108.14 yen following the news, breaching several layers of chart support and reaching its lowest since early November. The euro dipped to a three-week low at 120.63 yen.
The yen is often used as a safe harbour during times of global tensions given Japan's status as the world's largest creditor nation. A holiday in Tokyo also made for thin conditions, exaggerating the move.
The holiday meant cash Treasuries were not trading yet, but Treasury bond futures gained 7 ticks on the news implying a drop in US yields.
Against a basket of currencies, the dollar eased a fraction to 96.770 but stayed above recent six-month lows around 96.355.
The dollar had found overnight support after dismal economic news from Europe and the UK weighed on the pound and euro.
Surveys showed British factory output fell in December at the fastest rate since 2012, while the German manufacturing sector stayed deep in contraction. The pound was flat at $1.3135, after easing from a top of $1.3266 on Thursday. The euro stood at $1.1171, after backing away from major chart resistance around $1.1249.
An index of US manufacturing activity due later is expected to show a slight uptick to 49.0 in December, from 48.1 the month before.
Figures out Thursday showed jobless claims edged lower last week in a positive signal for the US labour market.
The resilience of employment is a major reason the Federal Reserve has signalled no more rate cuts will be needed in this cycle, leading markets to sharply scale back expectations of further policy easing.
Several Fed official are speaking on Friday including Governor Lael Brainard and the heads of the San Francisco, Chicago, Richmond and Dallas banks.
Analysts expect they will remain upbeat on the economic outlook and reiterate a steady outlook for rates.
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