The dollar held near 2-1/2-month highs against a basket of currencies on Thursday after the US Federal Reserve signalled it may raise interest rates in December, when the European Central Bank is widely expected to add to its stimulus.

The reaffirmation of a contrasting direction in monetary policy was enough to boost the dollar index to as high as 97.818, its highest level since August 10.

A break above its August 7 peak of 98.334 would bring the index out of its trading range in the past half year, opening the way for a test of its 12-year peak hit earlier this year at 100.39. It last stood at 97.64.

Fed policy stance

The Fed, which kept its rates on hold as expected on Wednesday, took an unusual step of making direct reference to its next meeting in its statement.

“In determining whether it will be appropriate to raise the target range at its next meeting, the committee will assess progress — both realised and expected — toward its objectives of maximum employment and 2 per cent inflation," it said.

In another hawkish tilt, the Fed also took out a warning about slowing global growth, going against earlier speculation that China’s cooling economy could delay a rate hike in the United States.

Dec rate hike

As a result, money market futures are pricing in about a 50 per cent chance of a rate hike in December, compared with around 30 per cent previously.

“The Fed's statement is open to interpretation. But for those who have been waiting for a December rate hike, it could be taken as paving the way for that,’’ said Daisuke Uno, chief strategist at Sumitomo Mitsui Bank.

Yet, many investors are not convinced given a recent run of soft US data, making economic releases in coming weeks, starting with the advance reading of US GDP due later on Thursday, more crucial in determining the odds of a December move.

Economists also expect a key US manufacturing index due on Monday to show the first contraction in the sector in 2-1/2 years, which would not be conducive for an imminent rate hike.

As the dollar held an upper hand, the euro fell to $1.0896 on Wednesday and last stood at $1.0924.

ECB stimulus

The euro has fallen 3.7 per cent since ECB President Mario Draghi signalled the bank was ready to expand its stimulus and cut interest rates deeper into negative territory a week ago.

Against the yen, the common currency fell to a six-month low of 131.97 yen.

The yen, which had fallen after the Fed's statement, recouped much of its previous day's losses after Japan's industrial production beat market expectations, which in turn reduced the chance of an immediate BOJ policy move.

The dollar fell to 120.67 yen, from the day's high of 121.18.

“In terms of economics, an uptick in industrial output and the Fed’s hawkish tone reduce pressure on the BOJ to ease,’’ said Shusuke Yamada, chief Japan FX strategist at Merrill Lynch.

“But you cannot make judgement on the BOJ’s policy purely based on economics. So you cannot rule out the chances of easing completely... There’s politics to consider. The BOJ will likely ease once before the upper house election next summer,’’ he added.

BOJ stimulus

Markets are split on whether BOJ will adopt additional stimulus at its meeting on Friday.

Although some Japanese policy makers have in recent days openly questioned the need for another monetary stimulus at this point, easing hints from the ECB and surprise rate cut by China last week have fanned speculation of BOJ action.

Elsewhere, the New Zealand dollar eased 0.4 per cent to $0.6671 after the central bank kept rates on hold as expected but voiced concern about the rising local currency, suggesting the bank may cut rates again at its next meeting.

Earlier, it hit a two-week low around $0.6622.

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