(Updates prices, adds quote)
* Dollar extends overnight gains versus yen, euro after Fed
* BOJ stands pat on policy as expected, little market reaction
* Norway’s central bank shortens path to rate hike
* Graphic: World FX rates in 2017 tmsnrt.rs/2egbfVh
By Ritvik Carvalho and Dhara Ranasinghe
LONDON, Sept 21 (Reuters) - The dollar rose to a two-month high against the yen on Thursday after a hawkish-sounding U.S. Federal Reserve heightened expectations of an interest rate increase in December.
At the end of a closely watched two-day policy meeting on Wednesday the Fed left interest rates unchanged as expected and signalled that it is still on track for one more increase by the end of the year despite recent low inflation.
After some talk before the meeting that the Fed could hold off from raising rates again this year, the dollar jumped on the statement and extended those gains on Thursday to a two-month high of 112.725 yen. It later edged back slightly to 112.540 yen, still 0.3 percent up on the day.
The index that measures the dollar’s strength against a basket of currencies dipped 0.1 percent on the day to 92.451 after rising more than 1 percent after the Fed meeting to its highest level in two weeks.
“I don’t expect the dollar will strengthen very much over the course of today’s session,” said Commerzbank’s Frankfurt-based head of FX strategy Ulrich Leuchtmann.
“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.”
Interest rate futures traders now price in about a 70 percent chance of a December Fed rate hike, up from above 50 percent before the meeting, according to CME’s FedWatch tool.
The euro recovered ground against the dollar to trade 0.1 percent higher at $1.1903 after a four-session wining run had come to an end with the previous day’s 0.8 percent fall.
Some currency analysts said the dollar has further room to rally.
Kathleen Brooks, research director at City Index in London, said that if data continued to point to strong jobs growth and a low unemployment rate, a December Fed rate rise was likely, boosting prospects for the dollar.
“The dollar index has been a one-way bet for so long... there’s so much room for the dollar to move higher,” she said.
Currencies were little moved by the Bank of Japan’s widely expected decision to stand firm on monetary policy.
New Zealand’s dollar was down 0.7 percent at $0.7309 , with its rally the previous day losing steam against a broadly stronger dollar.
The Australian dollar was the biggest mover on the day, falling 1.1 percent to $0.7941.
Norway’s crown strengthened against the dollar and euro after the country’s central bank kept its policy rate unchanged but said a rise is likely earlier than previously expected.
The crown was up 0.4 percent at 9.314 per euro and 0.7 percent firmer against the dollar at 7.82 crowns.
For Reuters Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets (Reporting by Ritvik Carvalho and Dhara Ranasinghe; Editing by Toby Chopra and David Goodman)
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