The dollar rose to a two-month high against the yen and extended its gains against the euro on Thursday after a hawkish-sounding Federal Reserve heightened expectations for an interest rate hike in December.

After concluding a closely watched two-day policy meeting on Wednesday, the Fed had left interest rates unchanged as expected, but signalled it still expects one more increase by the end of the year despite a recent bout of low inflation.

The US central bank, as anticipated, also said it would begin in October to reduce its balance sheet of around $4.2 trillion in US Treasury bonds and mortgage-backed securities it acquired after the 2008 financial crisis.

The dollar was 0.4 per cent higher at 112.610 yen after brushing 112.725, its highest since July 18. The index that measures the greenback’s strength against a basket of peers, was up 0.1 per cent on the day at 92.558 after hitting its highest level in two weeks in the wake of the Fed meeting.

“I don’t expect that the dollar will strengthen very much over the course of today’s session,” said Commerzbank’s head of FX strategy, Ulrich Leuchtmann in Frankfurt.

“Even if the dollar gets stronger, it will not be on a scale comparable to yesterday, because I think the outlook is still uncertain and the Fed for a long time had promised to hike rates much more aggressively than they normally did.”