The safe-haven yen and Swiss franc rose against the dollar on Monday on worries about a broader escalation of conflict in the Middle East after the United States killed Iran's most prominent military commander.
The moves extended a flight to safety that began on Friday after Iranian Major-General Qassem Soleimani was killed in a U.S. drone strike on his convoy at Baghdad airport. U.S. President Donald Trump warned of a "major retaliation" if Iran hit back, while Iran's replacement commander vowed to expel the United States from the region.
"The market is still digesting the implications of the Iran situation," said Edward Moya, senior market analyst at OANDA in New York. "We're having a little softness in the dollar against safe-haven currencies, but I think risk appetite will return. If Iran does retaliate, they know they're toast."
On Sunday, Iran further distanced itself from the 2015 nuclear agreement with world powers, which the United States withdrew from in 2018, saying it would continue to cooperate with the U.N. nuclear watchdog but would respect no limits to its uranium enrichment work.
The yen surged on Monday to a three-month high around 107.75 versus the U.S. dollar, which was last trading slightly down at 108.13 yen. The Swiss franc, another safe-haven currency, rose against the dollar, which fell 0.2% to 0.9701 franc. The dollar index was down 0.22% at 96.63.
The greenback is sometimes seen as a safe-haven asset given that most central banks hold it as their main reserve currency and a big chunk of global companies trade using dollars, but the yen and the franc represent a more traditional safe-haven bet.
Implied volatility gauges in euro/dollar, the most traded currency pair, on the other hand, were relatively calm, suggesting investors are not yet fleeing to add protection to their portfolios by buying currency options. A currency volatility index developed by Deutsche Bank was only marginally up and still close to its lowest levels on record. Currencies sensitive to global risk appetite were weaker, including the Australian dollar, New Zealand dollar and Swedish crown.
"Iran is almost certainly to respond in some scale, scope and magnitude," said Lee Hardman, currency analyst at MUFG. Therefore "market participants are likely to remain nervous until there is more clarity over how geopolitical tensions between the U.S. and Iran will proceed," Hardman said, noting that geopolitical tensions could hurt global economic growth, especially if the price of oil increases.
Elsewhere, the British pound was trading up 0.6% at $1.3164 ahead of a crucial week when British lawmakers are due to reconvene to debate the Brexit deal Prime Minister Boris Johnson has agreed with Brussels.