The South Korean won struck a two-month peak against the dollar on Monday as a slow recovery in investor appetite for risk pushed up some Asian currencies, while oil and gold prices surged on the violence in the Middle East.
The dollar took a hit from the jump in oil and gold prices as the conflict between Israel and Hamas in the Gaza Strip stirred worries about energy supply disruptions and prompted a shift of funds to safer investments.
Asian stocks dipped for a second straight day, with bank and financial shares weaker and energy-sensitive shares like airlines falling on the oil rebound.
Trading activity was limited before New Year's holidays.
Government bonds rose as investors see economies struggling through next year and after central banks have chopped interest rates aggressively, with the 30-year Japanese government bond yield hitting a five-year low of 1.775 percent.
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Investors are grappling with a reality of a sharp global slowdown and a huge hit to corporate earnings results next year, but also the prospect of big government spending in 2009 to revive growth.
Many portfolio managers remain cautious even as this year's sell-off has halved the value of Asian stocks, and they are waiting to see just how severe the blow to companies will be.
"Rather than seeing a rebound on value, we want to see companies that can deliver growth in an environment that we have got," said Steven Robinson, a fund manager with Alleron Investment Management in Sydney.
The MSCI index of Asia-Pacific stocks outside Japan dipped 0.2 percent, with this year's losses totaling 55 percent - by far the biggest yearly slide since the index began in 1988.
In Japan, the Nikkei 225 average dropped 0.8 percent on the last full trading day of the year, pulling back from a six-week closing high reached on Friday.
But Japanese non-life insurers jumped on news that Mitsui Sumitomo Insurance Group Holdings was in talks to merge with counterparts.
The dollar fell across the board, suffering its biggest losses against the safe-haven Swiss franc after Israeli warplanes pounded the Gaza Strip for a third consecutive day and prepared for a possible invasion after killing more than 300 Palestinians.
The dollar shed 0.8 percent to 1.0595 francs, while the euro climbed 0.6 percent to $1.4145.
The euro stuck an all-time peak against the British pound at 96.315 pence, taking its closer to parity as euro zone rates are poised to stay above those in Britain.
As the U.S. currency retreated, gold prices jumped $15.60 an ounce, or nearly 2 percent, to $882.30 and hit an 11-week peak.
U.S. crude oil was up $1.55 a barrel to $39.26, helping life shares of companies like Japan's Inpex Holdings.
Despite the heightened caution and woes for other emerging market countries, Asian currencies gained on the day.
The South Korean won, the most battered regional currency in the financial crisis, climbed about 1 percent to 1,285.8 against the dollar and hit a peak of 1,269.9.
In government bonds, the 10-year Japanese government bond yield dipped half a basis point to 1.195 percent.
U.S. Treasuries were little changed, with the benchmark 10-year yield steady at 2.135 percent, holding 10 basis points above a five-decade low hit earlier in the month.
