The safe-haven yen and Swiss franc pulled back from recent highs against the dollar on Tuesday as financial markets stabilized, with investors turning more hopeful that tensions between the United States and Iran would not escalate into an all-out war.
Better-than-expected U.S. non-manufacturing sector and factory orders data also lifted the dollar. The yen fell from a three-month high versus the dollar, although sentiment remains fragile amid nagging worries about the impact of the deterioration in U.S.-Iran relations.
A U.S. drone strike in Baghdad on Friday killed Iranian military commander Qassem Soleimani, widely seen as Iran's second-most powerful figure. The Swiss franc, another safe haven, fell from four-month highs against the euro and dropped versus the dollar.
"There's a mild de-escalation of U.S.-Iran tensions," said Erik Bregar, director and head of FX strategy at Exchange Bank of Canada in Toronto. "That's evident by seeing gold and oil off their Sunday highs. But it's not over in terms of war-rhetoric."
The dollar was slightly higher against the yen at 108.52 yen, moving away from a three-month low hit on Monday. The Swiss franc also weakened, with the dollar up 0.4% at 0.9717 franc.
The dollar index, which fell on Monday, gained 0.3% to 96.99, as the euro fell 0.4% to $1.1147 .
The dollar got a boost after data showed the Institute for Supply Management's non-manufacturing index at 55 in December, up from 53.9 in November and slightly higher than market expectations. U.S. factory orders, however, fell 0.7% in November, though that was a little better than forecasts of a 0.8% drop.
That said, the dollar's performance has been mixed in recent sessions, with the slightly better-than-expected euro zone business survey data on Monday supporting the euro. The euro was little moved by data showing inflation in the zone accelerated in December and retail sales were stronger than expected.
Recent survey data has pointed to improving investor and business confidence in the euro zone. Elsewhere in the currency market, the onshore yuan rose to a five-month high of 6.9315 per dollar - a sign that traders are ready to put aside concerns about a more significant confrontation between Tehran and Washington.
The offshore yuan gained 0.5% to 6.9293 yuan per dollar, its highest since Dec. 13. The United States and China are expected to sign a preliminary deal on Jan. 15 to de-escalate their prolonged trade war.
The Australian dollar, meanwhile, was the biggest loser among the G10 currencies, dropping 1.0% versus the greenback to 68.72 U.S. cents, as markets worried about the economic impact of deadly bushfires ravaging the country.