The safe-haven yen fell from three-month highs against the dollar on Wednesday, as investors grew more optimistic that Iran's attack on U.S. forces in Iraq overnight was unlikely to escalate into a full-blown regional conflict.
Another safe haven, the Swiss franc, also pared gains that took it to a more than one-week peak versus the greenback earlier in the global session. Gold also gave up earlier gains as did crude oil.
Traders said the focus would now turn to what response, if any, the United States is planning. Iran said it had fired missiles at U.S. targets in Iraq on Wednesday in retaliation for last week's U.S. drone strike that killed Iranian commander Qassem Soleimani, stoking fears of a new war in the Middle East.
However, Twitter posts from both sides playing down the prospect of further escalation helped calm currency markets. U.S. President Donald Trump tweeted that a damage assessment was "So far, so good!" and said "all is well," promising a further statement later on Wednesday.
Iranian Foreign Minister Mohammad Javad Zarif tweeted that the attack was "proportionate" and that "we do not seek escalation or war."
"The markets tend to exaggerate geopolitical developments," said Marc Chandler, chief market strategist at Bannockburn Global Forex in New York. "I do think that this is a relief rally and sort of the mirror image of the knee-jerk sell-off that we saw last week."
Safe havens
The yen, regarded as a safe haven in times of geopolitical turmoil due to its liquidity and Japan's current account surplus, slipped, pushing the dollar up 0.66% at 109.14 yen.
The dollar earlier dropped to a three-month low of 107.66 yen following Iran's strike. The dollar was little changed against the Swiss franc, at 0.9702 franc, after falling to a more than one-week trough earlier in the global session.
A higher-than-expected U.S. private payrolls number for December also boosted the dollar, with the dollar index rising 0.27% to 97.27.
The ADP National Employment Report on Wednesday showed private payrolls jumped month after an upwardly revised 124,000 gain in November. Economists polled by Reuters had forecast private payrolls advancing 160,000 last month following a previously reported 67,000 rise in November.
"The market still has the ultimate ballast, or anchor, which is the U.S. economy," said Bannockburn's Chandler. "Even though there's some variance month-to-month between the ADP and the non-farm payrolls report, the ADP is still a good indicator of the underlying trend."
The euro was down 0.3% at $1.1124, hovering near session lows.