The yen and Swiss franc retreated on Thursday as the United States and Iran backed away from further conflict, with markets flipping back to the old habit of more risk-taking on hope of a U.S.-China trade deal.

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

The yen, regarded as a safe haven in times of geopolitical turmoil because of its deep liquidity as well as Japan's current account surplus, quickly reversed its gains made after Wednesday's missile strike.

The dollar traded at 109.19 yen, jumping back sharply from a three-month low of 107.65 yen touched on Wednesday.

The Swiss franc, another safe-haven currency, followed a similar path.

The dollar rose to 0.9740 franc from Wednesday's low of 0.96655 while the euro firmed to 1.0828 franc from 21-month low of 1.07825 set on Wednesday.

Gold, often sought during times of major military conflicts as an ultimate store of value, also dropped to $1,559.4 per ounce after hitting a seven-year high of $1,610.9.

"The targets Iran chose to attack do not seem to be of major importance. Nor does there seem to be any casualties on the U.S. side," said Kazushige Kaida, head of foreign exchange at State Street.

"So markets have interpreted the attack as mainly for Iran's domestic audience. U.S. public opinion also does not support a war with Iran. So for people like us, short-term traders, the lesson from yesterday was that you can make money by taking advantage of knee-jerk market reactions from news headlines and markets could become more risk-tolerant," he said.

Traders' 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.

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.

Given various risks--from rising U.S. corporate debt levels, already frothy U.S. share valuations to economic and political uncertainties in Europe--global growth is more likely to be steady around 3 percent, rather than accelerating, said Nouriel Roubini, CEO of Roubini Macro Associates in New York.

The euro traded at $1.1116, flirting with its lowest prices in almost two weeks, not helped by weak German industrial orders data.

Industrial orders in the euro zone's biggest economy unexpectedly fell 1.3 percent in November due to weak foreign demand.

The Australian dollar fetched $0.6870, having hit a three-week low of $0.6849 on Wednesday.

Masafumi Yamamoto, chief currency strategist at Mizuho Securities, said huge bush fires in Australia appeared to be weighing on the currency "economically and politically."

"Economic data such as car sales and job ads show damage and Prime Minister Scott Morrison has come under criticism for his handling and climate policy," Yamamoto said.

The Aussie is the worst performer among Group of 10 currencies so far this year, having fallen 2.1 percent.