U.S. President Donald Trump responded to an Iranian attack on U.S. forces with sanctions, not violence. Iran offered no immediate signal it would retaliate further against a Jan. 3 U.S. drone strike that killed its senior military commander.

The yen, seen as a safe haven in times of geopolitical turmoil because of its deep liquidity and Japan's current account surplus, reversed the gains it made against the dollar after Iran's missile strike. The dollar was last up 0.2% at 109.39 yen, after earlier hitting 109.48 yen, its highest since Dec. 30.

"Trump completely downplayed the idea of going to war with Iran or even any sort of retaliatory measures," said Brad Bechtel, managing director, Jefferies in New York.

"His decision to take the higher ground and ease the emotions around the tit for tat have ... acted to soothe markets and the bid tone to risk assets returned immediately," he added.

Gold prices also slid, retreating further from a near-seven-year peak scaled in the previous session.

Implied volatility gauges for euro/dollar are falling back toward late 2019 lows, which is "very telling," according to Reuters analysts.

Three-month implied volatility in euro/dollar fell to 4.27% at the end of November, its lowest level on record.

Focus is expected to shift back to the global economy, with expectations that the United States and China will sign a trade deal next week providing underlying support for risk assets.

China's Vice Premier Liu He, head of the country's negotiation team in the Sino-U.S. trade talks will visit Washington on Jan. 13-15, Gao Feng, spokesman at the commerce ministry said. Negotiating teams from both sides remain in close communication on the particular arrangements of the signing, Gao told reporters at a regular briefing.

Investors think the deal will clear one of the world economy's biggest uncertainties and help boost global growth this year, although some think that view is too optimistic.

China's yuan rose to a five-month high of 6.9175 against the dollar overnight in the offshore market , boosted also by a steady inflation readout.

In early morning trading, the dollar index was higher on the day, up 0.1% at 97.428.

The Swiss franc though remained elevated against the dollar, which fell 0.2% to 0.9722.

(Reporting by Gertrude Chavez-Dreyfuss; Additional reporting by Olga Kotaga in London)

By Gertrude Chavez-Dreyfuss