By Kevin Buckland and Amanda Cooper

TOKYO/LONDON (Reuters) -The dollar fell to its lowest against the yen this year on Wednesday after investors upped the chances of Democrat Kamala Harris beating Republican rival Donald Trump in November’s presidential election after a scheduled debate.

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

Traders were also awaiting 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 1.24% to 140.71 yen, a level not seen since Dec. 28, before trading at 141.16 yen.

The dollar-yen pair tends to track long-term Treasury yields, which extended an overnight decline to touch their lowest since June 2023, at 3.605%.

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

Sentiment on Wednesday was fragile, drawing flows out of the dollar and into the likes of the yen, the Swiss franc and gold.

“There’s definitely risk-off sentiment that is leading to caution,” said XTB research director Kathleen Brooks.

“There’s a lot of changes in this economic cycle – monetary, with monetary policy changes, and also political – and that’s what is adding to the sense of unease.”

Vice President Harris, the Democratic candidate, put former President Trump on the defensive in a combative debate, with a stream of attacks on abortion limits, his fitness for office and his myriad legal problems.

She also received a boost from pop megastar Taylor Swift, who told her 283 million Instagram followers she would back Harris and running mate Tim Walz in the Nov. 5 election.

Following the debate, online betting site PredictIt showed Harris’ chances of winning improved 3 cents to 56 cents for a $1 payout, while Trump’s chances dropped 5 cents to 47 cents.

The dollar index – which measures the currency against six others – slipped 0.22% to 101.43 after rising to a one-week top at 101.77 on Tuesday.

The Swiss franc strengthened for a second day, pushing the dollar down 0.2% to 0.8455 francs.

The euro rose 0.2% to $1.1039, recovering from an overnight slide to $1.10155, its lowest since Aug. 19.

“The FX market is showing some further signs of risk aversion this morning although more from the strong performance of the safe-haven currencies rather than poor performance of the high-beta currencies,” MUFG strategist Derek Halpenny said.

Among the high-beta – or more volatile – currencies, sterling was flat at $1.30805 after data showed the UK economy stagnated unexpectedly in July, although the report did little to shift expectations for the Bank of England to lower rates next week.

The U.S. Federal Reserve looks set to ease policy on Sept. 18 for the first time in more than four years, although traders are split on the size of the expected rate cut.

Fed funds futures indicate a 63% chance of a standard 25-basis point reduction, and a 37% chance of a super-sized 50 bps, according to the CME’s FedWatch tool.

Wednesday’s CPI report is expected to show headline inflation rose 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.

(Additional reporting by Kevin Buckland in Tokyo; Editing by Shri Navaratnam, Sam Holmes, Jamie Freed and Christina Fincher)

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