* U.S. bond yields rise on growth, deficit concern
* Dollar index breaches 100-day moving average
* Options market flags further dollar/yen rise
(Adds comment, updates prices, changes byline)
By Wanfeng Zhou
NEW YORK, Dec 8 (Reuters) - The dollar rose versus the yen
on Wednesday and looked poised to extend gains after a proposed
extension of tax cuts sparked a rally in U.S. bond yields.
For the first time in weeks, euro zone debt concerns were
placed on the back burner as investors focused on U.S. economic
and interest-rate fundamentals in a thinning market as the end
of the year approaches.
U.S. Treasury prices plunged for a second straight day,
pushing benchmark yields <US10YT=RR> to a six-month high.
Higher yields tend to boost the greenback, enhancing the
attractiveness of dollar-denominated assets.
While the tax deal also fueled fears about deteriorating
U.S. fiscal health, which is negative for the dollar, currency
investors have focused more on the better growth prospects that
the tax cuts may induce, at least for now.
"The whole interest-rate differential argument is turning
out to be dollar supportive, at least in the near term," said
Paresh Upadhyaya, head of Americas G10 FX Strategy at BofA
Merrill Lynch Global Research in New York.
"I do think that in the longer term, the rising budget
deficit is clearly dollar negative," he added.
Some analysts said the tax cuts could boost U.S. gross
domestic product growth by as much as 2 percentage points next
year. For analysis, see []
"What this means is that it reduces the probability or the
odds of quantitative easing, which is good for the dollar,"
said Richard Franulovich, senior currency strategist, at
Westpac in New York.
The dollar last traded up 0.6 percent at 83.99 yen
<JPY=EBS> after hitting a session high at 84.31 yen on trading
platform EBS.
Against a basket of six currencies, the dollar index <.DXY>
rose 0.2 percent to 80.052, moving above its 100-day moving
average at 79.981. If sustained that would be a bullish
signal.
The dollar pared gains versus the yen and euro following a
$21 billion sale of 10-year Treasury notes, which pushed yields
off their highs.
<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
For analysis on US tax deal: []
Full coverage of tax and deficit debates: []
Graphic: Tax proposal: record deficit, more growth
http://r.reuters.com/fuc98q
Graphic: U.S., European debt, deficit and bond yields
http://r.reuters.com/gyb29q
Graphic: Treasury sell-off: http://r.reuters.com/ruj29q
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FURTHER DOLLAR STRENGTH
For the near-term, resistance for dollar/yen is around
84.40, which will attract offers from Japanese exporters. A
break of that level could see the pair extend gains toward
84.60, followed by 85.40 and a retest of the September high
around 85.95 yen, traders said.
In the options market, traders said there was high investor
demand for bullish dollar/yen option structures, ranging from
calls, call spreads, to barrier-type options where there's a
pay-off if the pair rises.
The euro fell 0.1 percent to $1.3248 <EUR=EBS>. Its failure
this week and last to hold above $1.3400 suggests a probe
lower, with a sustained break of $1.3180 opening the way for a
test of $1.3060/50.
Bids from Asian central banks and Middle East accounts were
seen around $1.3200 and $1.3180, respectively, traders said.
Ireland moved a step closer to securing bailout funds after
passing the first in a series of votes on its toughest budget
on record, but traders said investors were still likely to sell
the euro on any bounce, given worries about the European
Union's ability to keep debt problems from spreading.
Sentiment in the options market remained negative on the
euro, with investors buying new bearish structures, although
volume has fallen from highs seen two weeks ago, traders said.
(Additional reporting by Gertrude Chavez-Dreyfuss; Editing by
Kenneth Barry)
