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The safe-haven dollar rose on Monday against the euro and sterling as military clashes between Israel and the Palestinian Islamist group Hamas deepened political uncertainty across the Middle East.

Risk sentiment was fragile after Israeli forces fought gunmen from the Palestinian group Hamas over the weekend, hours after the militants launched an attack on Israel in the deadliest day of violence in the country for 50 years.

The Israeli shekel was last 2% lower at 3.9151 per dollar after the Bank of Israel announced it would sell up to $30 billion of foreign currency in the open market to maintain stability. Earlier in the day, the shekel tumbled more than 3% to an almost eight-year low of 3.9880 per dollar.

The dollar index was last 0.25% higher at 106.49, while the Japanese yen - another traditional safe-haven currency - edged 0.1% higher to 149.16 per dollar, in thinned Asian trade, with Japan closed for a holiday.

The euro and sterling each fell 0.5% against the broadly strengthening dollar. The euro dropped to $1.0531, and sterling to $1.2169.

"If a war breaks out anywhere in the world it is a good idea to hold U.S. dollars. It can therefore come as no surprise that the greenback started trade last night with some gains," said Ulrich Leuchtmann, Head of FX and Commodity Research at Commerzbank.

The dollar also drew support from Friday's data showing U.S. employment increased by the most in eight months in September, potentially setting up for a higher-than-expected inflation print later this week.

Net long positions on the dollar rose to a one-year high, according to U.S. Commodity Futures Trading Commission data released on Friday.

The value of the net long dollar position was $10.55 billion for the week ended Oct. 6.

But investors aren't expecting another hike from the Federal Reserve in November, according to CME Group data. Market pricing shows a roughly 78% chance that the Federal Reserve will keep rates on hold at its November policy meeting.

"The key debate is whether the U.S. dollar's inverse relationship with risk appetite will become more pronounced again. Its inability to capitalise on healthy U.S. labour market data brings that thinking to the fore," said Paul Mackel, Global Head of FX Research at HSBC.

The dollar index, which measures the greenback against six peers, posted its first weekly decline on Friday after 11 consecutive weeks of gains.

Rekindling recession fears in the euro zone, data showed on Monday that German industrial production fell slightly more than expected in August, by 0.2% compared to the previous month.

The Australian dollar, seen as a proxy for risk appetite, slid 0.4% to $0.6359.

In Asia, China's yuan held firm against the dollar on the first trading day after Golden Week holiday, underpinned by a stronger-than-expected official guidance fix.

The offshore yuan rose 0.2% to 7.2943 per dollar.