By Ken McCallum

(Bloomberg) -- The yen led currencies higher versus the dollar, erasing this year’s losses as investors reacted to comments from a Bank of Japan board member and the US presidential debate.

The Japanese currency rallied as much as 1.2% to 140.71 against the greenback, the strongest level since Dec. 28, after board member Junko Nakagawa indicated that the BOJ will continue to adjust policy going forward provided the economy performs in line with their projections.

The dollar also fell versus most of its Group-of-10 peers and Asian currencies including the Philippine peso and Indonesian rupiah. The moves coincided with the first presidential debate between Democrat Kamala Harris and Republican Donald Trump.

“The yen was the main trigger” for Asian currencies trading higher, said Christopher Wong, currency strategist at Oversea-Chinese Banking Corp. “Gains in Asian currencies can continue as long as global growth continues to trudge along the lines of not-hot-not-cold.”

Nakagawa also said the impact of the currency on inflation was now bigger than had been the case previously.

The yen’s advance weighed on Japan’s exporter-heavy stock market, with the benchmark gauges closing at their lowest levels in a month. With betting odds improving for Harris over Trump, US equity futures weakened slightly and Treasury futures rose. Bitcoin also slipped after the debate and Taylor Swift’s endorsement of Harris. 

“Harris definitely did better than expected according to the betting market,” Marko Papic, chief strategist at BCA Research, said by phone. “But it’s unlikely to be seen as a definite victory for her. It’s difficult for the market to really price in any significant political changes.” 

Uncertainties about the US election outcome will likely linger going into the November vote, barring a sharp boost in ratings or betting odds.

“Although the odds of victory have shifted after the debate, it is still too close to call for market participants,” said said Eugenia Victorino, head of Asia strategy at SEB. The gains in the Japanese yen were driven by expectations on the Bank of Japan and not an indication of risk sentiment due the debate.”

While most BOJ watchers expect the central bank to hold interest rates steady at its meeting next week, Nakagawa’s comments served as a reminder that rate hikes are still in the pipeline should the economy and prices continue in line with forecasts.

Nakagawa’s comments that appeared to be positive about normalizing monetary policy may have triggered losses in dollar-buying positions betting on US consumer price index data later Wednesday and a 25 basis-point rate cut in September by the Federal Reserve, according to Hiroyuki Machida, director of Japan FX & commodities sales at ANZ Group Holdings.

The yen has been in a broad appreciation trend since hitting a multi-decade low of 161.95 on July 3. Much of the turnaround has been driven by market expectations that the interest rate differential between the US and Japan will narrow further this year.

Nakagawa’s comments underpin the BOJ’s message that it will raise rates further if conditions are right, a stance signaled recently by board members including Governor Kazuo Ueda. 

Most economists expect the BOJ to hold policy steady when the board concludes its next meeting on Sept. 20, with many expecting authorities to wait until December or January before making its next move.

The yen may rise toward the mid-130s level against the dollar in the next 12 months as the BOJ will prefer to keep another rate increase as a policy option in order to support the currency, said Homin Lee, senior macro strategist at Lombard Odier Singapore Ltd. 

Japanese voters are unhappy about the yen’s extreme weakness and higher prices, said Lee, who expects BOJ to hike another 25 basis points in December.

--With assistance from Daisuke Sakai, Malavika Kaur Makol, Ye Xie, Ronojoy Mazumdar and Winnie Hsu.

(Updates market data and adds an analyst quote)