The yen hovered near a five-week high, while the dollar held close to a three-week peak against the euro on Wednesday, as traders anxiously awaited a key inflation report. This data could offer insights into how aggressively U.S. interest rates might be cut in the upcoming Federal Reserve meeting.

Investors were also cautious ahead of the first debate between U.S. presidential candidates Kamala Harris and Donald Trump, with both contenders running neck-and-neck in polls ahead of the November election.

As of 0009 GMT, the dollar was down 0.2%, trading at 142.18 yen, approaching its recent low of 141.75 yen, a level not seen since August 5. The yen, often viewed as a safe-haven currency, tends to move with long-term U.S. Treasury yields, which dipped overnight.

The euro remained steady at $1.1019 after sliding to $1.10155 during the previous session, its lowest since August 19. Sterling was also flat at $1.3080, following its dip to $1.3049 in the prior session, the weakest since August 21.

The dollar index, which tracks the greenback against six major currencies, was stable at 101.66, after reaching a one-week high of 101.77 overnight.

The Federal Reserve is expected to ease monetary policy on September 18, marking its first rate cut in over four years. However, there is uncertainty about the size of the cut, with Fed funds futures showing a 69% chance of a 25-basis point cut and a 31% chance of a larger 50-basis point cut.

Analysts expect U.S. headline consumer price index (CPI) inflation for August to rise by 2.6% year-on-year, down from 2.9% in July, according to a Reuters poll.

“Markets are looking for evidence that inflation is easing enough to give the Fed room to cut rates by 50 basis points if needed,” said Kyle Rodda, senior market analyst at Capital.com. However, he cautioned that a significant downside surprise could signal a demand shock, which would be unwelcome.

In addition to economic concerns, investors were focused on the upcoming debate between Trump and Harris. Broadly, a Trump victory is seen as potentially strengthening the dollar due to tariffs supporting the currency and higher fiscal spending boosting interest rates. The debate holds particular significance, as a previous debate between Trump and President Joe Biden led to Biden withdrawing from the race.

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