Investing.com - The dollar fell to two-and-a-half month lows against the yen on Monday in the first trading session of 2016 as heightened tensions in the Middle East and weak data out of China hit risk sentiment, fuelling increased safe haven demand.
USD/JPY fell 1.14% to 118.86, the weakest level since October 15.
The dollar was also weaker against the traditional safe haven Swiss franc, with USD/CHF down 0.92% to 0.9932.
The drop in the dollar came after Saudi Arabia cut diplomatic relations with Iran on Sunday after protesters stormed the Saudi embassy in Tehran following the execution of prominent Saudi Shia cleric Sheikh Nimr al-Nimr.
Meanwhile, Asian stock markets were hit after data from China showing that manufacturing activity contracted for the tenth straight month in December.
The Caixin manufacturing purchasing managers' index fell to 48.2 from November’s reading of 48.6, and was below market forecasts of 49.0.
It was the lowest reading since September and was well below the 50-point level which separates expansion from contraction.
The U.S. dollar index, which measures the greenback’s strength against a trade-weighted basket of six major currencies, fell 0.55% to 98.22.
The index ended 2015 with gains of 8.96% bolstered by the diverging monetary policy stance between the Federal Reserve and other world central banks, particularly the European Central Bank and the Bank of Japan.
The euro gained ground against the softer dollar, with EUR/USD advancing 0.67% to 1.0927, while the pound recovered from eight-and-a-half month lows, with GBP/USD rising 0.14% to 1.4759.
Investors were looking ahead to the ISM report on U.S. manufacturing activity later in the day. The U.K. was also to release survey data on manufacturing activity.