Safe havens gained, with Japan's yen rising half a per cent to the dollar to a two-month high and the Swiss franc hitting its highest against the euro since September.
Gold and other safe-haven assets including Oil prices increased over $2 a barrel on Friday because of the US killing of a top Iranian commander in an airstrike in Iraq ratcheted up tensions between the two national powers.
Traders were clearly spooked. The death of Iranian Major-General Qassem Soleimani, head of the elite Quds Force, prompted Iranian Supreme Leader Ayatollah Ali Khamenei to vow revenge.
Europe's stock markets fell 0.5 per cent in early trading as hopes for a lengthy New Year rally vanished. Safe havens gained, with Japan's yen rising half a per cent to the dollar to a two-month high and the Swiss franc hitting its highest against the euro since September.
The Middle East-focused oil markets saw the most dramatic moves. Brent crude futures jumped nearly $3 to $69.16 a barrel, also the highest since September, before easing back to $68.42.
"We are only into the third day of the new year, and a big fat dollop of geopolitical uncertainty has landed on investors' desks," said Jeffrey Halley, senior market analyst for Asia Pacific at broker OANDA.
"I am struggling to see how an Iranian riposte will not occur," he said. "Oil installations and tankers were my first thoughts."
Soleimani's Quds Force and its paramilitary proxies, ranging from Lebanon's Hezbollah to the PMF in Iraq, have ample means to mount a multi-pronged response.
In September, US officials blamed Iran for a missile and drone attack on oil installations of Saudi Aramco, the Saudi state energy giant and world's largest oil exporter. The Trump administration did not respond, beyond heated rhetoric and threats.
German Bunds and US Treasuries, the world's benchmark government bonds, caught a bid, too. Ten-year German yields, which move inversely to prices, fell further away from seven-month highs touched earlier in the week. US 10-year yields fell 5 basis points to a three-week low.
The focus on geopolitics meant markets paid little attention to stronger-than-expected data from France, where inflation rose 1.6 per cent year-on-year in December, beating analyst expectations for a 1.4 per cent rise.
"Markets still remain quite thin after the holidays, but even in a regular session we would have seen a similar reaction," said Christian Lenk, a rates strategist at DZ Bank in Frankfurt. "The repercussions from the airstrike are not clearly forecastable and tensions remain high in the region."
The airstrikes in Iraq also killed top Iraqi militia commander Abu Mahdi al-Muhandis. They came after US Defense Secretary Mark Esper said on Thursday there were indications Iran or forces it backed might be planning additional attacks, after Iranian-backed demonstrators stormed the US embassy in Baghdad.
Gold, a traditional refuge for risk-averse investors, rose 1 per cent to a four-month high of $1,543.66. For the week, it has gained about 2 per cent, heading for a fourth consecutive weekly increase.
"After the recent escalations in geopolitical issues, we see a resistance level near the $1,575 level for the next week," said Jigar Trivedi, a commodities analyst at Anand Rathi Shares & Stock Brokers in Mumbai.