Yen hits eight-month high as focus shifts to US election, BOJ rate hikes

By Kevin Buckland

TOKYO (Reuters) - The safe-haven yen hit its highest since the start of the year against the dollar on Wednesday after U.S. presidential contenders Kamala Harris and Donald Trump traded barbs in the only scheduled debate before November's election.

The yen received an additional boost from Bank of Japan board member Junko Nakagawa, who reiterated in a speech on Wednesday that the central bank would continue to raise interest rates if the economy and inflation move in line with its forecasts.

Traders were also waiting nervously for a key U.S. inflation report that could provide clues on how aggressively the Federal Reserve cuts rates next week.

The dollar dropped as much as 0.68% to 141.50 yen, a level not seen since Jan. 2, before trading at 141.56 yen as of 0327 GMT.

The dollar-yen pair tends to track long-term Treasury yields, which extended an overnight slump in Asian time to reach 3.625% for the first time since June 2023.

Mizuho Securities strategist Shoki Omori said Vice President Harris appeared to gain confidence as the debate progressed, and clearly set out her economic policies.

"That gave some relief to the market," weakening the dollar, Omori said, although he added "it's hard to say at this point what the direction for the dollar will be" in the event of a Harris or Trump presidency.

Investors broadly see the dollar strengthening in the event of a Trump victory, as tariffs might prop up the currency and higher fiscal spending could boost interest rates.

Meanwhile, the BOJ's Nakagawa "said real rates are still low, so there's more room to tighten policy," which helped strengthen the yen, Omori said.

The BOJ is widely expected to leave rates unchanged on Sept. 20, but a small majority of economists surveyed by Reuters last month predict further tightening by year-end.

By contrast, the Federal Reserve looks set to ease policy on Sept. 18 for the first time in more than four years, but traders are split on the size of the cut. Fed funds futures indicate a 67% chance of a standard 25-basis point reduction, and 33% odds of a super-sized 50 bps, according to LSEG calculations.

U.S. headline CPI is expected to have risen 2.6% year-on-year in August, according to a Reuters poll, slowing from 2.9% in July.

"Markets want to see evidence that inflation is behaving in a way that allows the Fed the wriggle room to cut 50 basis points if it needs to," said Kyle Rodda, senior markets analyst at Capital.com.

At the same time, "a significant downside surprise would not be welcomed by the market because it could be interpreted as a sign of an unfolding demand shock," he added.

The euro gained 0.17% to $1.10385, recovering from its overnight slide to $1.10155 for the first time since Aug. 19.

Sterling ticked up to $1.3092 following its drop to $1.3049 in the prior session, the weakest since Aug. 21.

The dollar index - which measures the currency against those three rivals and three other major peers - slipped 0.18% to 101.46 after rising to a one-week top at 101.77 on Tuesday.

In the heated debate, Democratic candidate Harris attacked Republican nominee Trump's intention to impose high tariffs on foreign goods, a proposal she has likened to a sales tax on the middle class. Harris also touted her plan to offer tax benefits to families and small businesses.

Trump criticised Harris for persistent inflation during President Joe Biden's term.

Following the debate, online betting site PredictIt showed Harris' odds of winning rising 2 cents to 55 cents, while Trump's chances dropped 5 cents to 47 cents.

"You'd expect if he was doing better, that you'd see a strong dollar coming out of this - so I suppose that's the way the market is looking at it," said Rob Carnell, ING's regional head of research for Asia-Pacific.

"It's a slight lean towards Harris."

(Reporting by Kevin Buckland; Additional reporting by Ankur Banerjee; Editing by Shri Navaratnam, Sam Holmes and Jamie Freed)