Kevin Backlund
TOKYO (Reuters) – The dollar fell more than 1 percent against the yen on Wednesday to its lowest this year after Senator Kamala Harris put rival Donald Trump on the defensive in the only scheduled debate of the U.S. presidential election.
The yen was forced to rise further after Bank of Japan board member Junko Nakagawa reiterated in a speech that the central bank would continue to raise interest rates if the economy and inflation progressed as expected.
Traders were also nervously awaiting the release of a key U.S. inflation reading that could offer clues as to how aggressively the Federal Reserve will cut interest rates next week.
The dollar fell as much as 1.24 percent to 140.71 yen, its lowest level since Dec. 28, but was trading at 141.16 yen as of 0547 GMT.
The dollar/yen exchange rate tends to track longer-term government bond yields, which extended their overnight decline in Asia, hitting 3.609% for the first time since June 2023.
“Harris was seen as a winner in the debate, which resulted in lower Treasury yields and a weaker dollar,” said Shinichiro Kadota, currency strategist at Barclays Securities in Tokyo.
He said this was the main reason for the sharp fall of the dollar against the yen, and that Nakagawa's comments had supported the yen “to a limited extent.”
Investors widely expect the dollar to rise if Republican candidate Trump wins, as tariffs would bolster the currency and increased fiscal spending could push up interest rates.
“The dollar/yen is still showing signs of weakness,” Kadota added. “I wouldn't be too surprised if it breaks through 140 yen.”
The dollar has not fallen below 140 yen since July last year.
Democratic candidate Vice President Harris put former President Trump on the defensive in a heated debate, attacking him on abortion restrictions, his fitness to serve as president and a host of legal issues.
She also received a boost from pop megastar Taylor Swift, who told her 283 million Instagram followers that she was endorsing Ms Harris and running mate Tim Walz in the November 5 election.
After the debate, online betting site PredictIt showed that the odds of Harris winning had risen by 2 cents to 55 cents, with a payout of $1, while the odds of Trump winning had fallen by 5 cents to 47 cents.
The dollar index against six major currencies fell 0.33 percent to 101.31 after rising to a one-week high of 101.77 on Tuesday.
The euro rose 0.25% to $1.1048, recovering for the first time since Aug. 19 from an overnight drop to $1.10155.
The pound rose 0.19% to $1.3105 after falling to $1.3049 in the previous trading day, its lowest level since August 21.
The Federal Reserve is expected to ease monetary policy for the first time in more than four years on September 18, but traders are divided on the size of the expected rate cut.
According to LSEG calculations, fed funds futures imply a 67% probability of a standard 25 basis point cut and a 33% probability of a mega 50 basis point cut.
In contrast, most economists surveyed by Reuters last month expected the Bank of Japan to raise interest rates again by the end of the year, but no change is expected at its next meeting on Sept. 19-20.
The immediate focus for U.S. economy watchers is the Consumer Price Index (CPI) report due later on Wednesday. A Reuters poll shows headline inflation is expected to have risen 2.6% year-on-year in August, slowing from 2.9% in July.
“The market wants to see evidence that inflation is moving in a way that gives the Fed room to make a 50 basis point rate cut if that's what it needs,” said Kyle Roda, senior market analyst at Capital.com.
At the same time, “a big downside surprise would not be welcomed by the market as it could be interpreted as a sign of a demand shock,” Roda added.
(Reporting by Kevin Buckland; Editing by Sri Navaratnam, Sam Holmes and Jamie Freed)
