Photo/Illutration Bank of Japan Governor Kazuo Ueda announces the issuance of new banknotes on July 3 at the central bank’s head office in Tokyo’s Chuo Ward. (Asahi Shimbun file photo)

The yen hovered near a five-week peak and the dollar hung close to a three-week top versus the euro on Wednesday, as traders waited nervously for a key inflation report that could provide clues on how aggressively U.S. rates would be cut next week.

Markets were also cautious ahead of the first debate between U.S. presidential hopefuls Kamala Harris and Donald Trump, with the candidates neck-and-neck ahead of the November election.

The dollar was down 0.2% at 142.18 yen as of 0009 GMT, heading back towards the recent low of 141.75 yen, a level previously not seen since Aug. 5. The safe-haven Japanese currency tends to track long-term Treasury yields, which slumped overnight.

The euro was little changed at $1.1019, after sliding to $1.10155 overnight for the first time since Aug. 19.

Sterling was flat at $1.3080, 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 - was steady at 101.66 after rising to a one-week top at 101.77 overnight.

The Federal Reserve is widely expected 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 69% chance of a standard 25-basis point cut, and 31% odds of a super-sized 50 bps, according to LSEG calculations.

U.S. headline CPI is expected to have risen 2.6% on a year-on-year basis in August, according to a Reuters poll, down 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.

Meanwhile, the televised debate between Republican nominee Trump and Democratic Vice President Harris was the immediate focus for investors, who broadly speaking 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.

The stakes are particularly high considering the debate between Trump and President Joe Biden ultimately spurred the incumbent to drop out of the race.

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