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 US 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 US-Iran relations.

A US 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 US-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."

In late morning trading, the dollar was slightly higher against the yen at 108.44 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.

The euro was little moved by data showing inflation in the zone accelerated in December and retail sales were stronger than expected.

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.