By James Ramage 

The dollar strengthened against rival currencies Friday, including reaching a new two-year high against the euro, as the U.S. currency continues to benefit from signals from the Federal Reserve regarding raising interest rates next year.

The euro fell 0.4% to $1.2233 in late-afternoon trade, the weakest it has been since Aug. 3, 2012. The dollar climbed 0.6% versus the yen to 119.49 yen, the highest in more than a week. The WSJ Dollar Index, which measures the dollar against a basket of currencies, rose 0.2% to 82.57, the highest since Sept. 19, 2003.

The dollar continued along the upward trajectory it has taken for much of the second half of 2014. Investors have been wagering the dollar would rise as stronger U.S. economic data would push the Fed to raise interest rates sooner than central banks in Japan and the eurozone.

On Wednesday, Fed Chairwoman Janet Yellen said the central bank could raise U.S. interest rates for the first time since the financial crisis as early as its April policy-setting meeting. Meanwhile, the Bank of Japan and the European Central Bank have been taking measures to ease policy in their battle to stimulate growth and ward off deflation, which have weakened their respective currencies.

Investors expect the Fed to raise rates around mid-2015. Higher U.S. interest rates are likely to make the dollar more attractive to yield-hungry investors as they boost returns on assets denominated in the currency.

Investors re-established their bets on a weaker euro on Friday, confident that the strong-dollar theme would persist beyond 2014, said Camilla Sutton, chief currency strategist at Scotiabank.

"All the events of this week still support a stronger dollar," Ms. Sutton said. "Other central banks are still set to loosen policy. Growth differentials are still in play."

Investors will shift their gaze next week to numbers measuring U.S. growth, inflation and unemployment claims.