* U.S. bond yields rise on inflation, deficit concern
* Dollar index breaches 100-day moving average
* Options market flags further dollar/yen rise
(Adds comment, updates prices)
By Wanfeng Zhou
NEW YORK, Dec 8 (Reuters) - The dollar headed for its
biggest three-day advance versus the yen in nearly three months
on Wednesday and looked poised to extend gains after proposed
tax cut extensions 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 as they enhance the
attractiveness of dollar-denominated assets.
While the tax deal fueled fears of deteriorating U.S.
fiscal health, which is negative for the dollar, currency
investors 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 [ID:nN07277043]
"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 0.7 percent at 84.04 yen
JPY=EBS after hitting a session high at 84.31 yen on trading
platform EBS. The dollar is on track for a gain of 1.7 percent
versus the yen in the past three sessions, the biggest since
Against a basket of six currencies, the dollar index .DXY
rose 0.2 percent to 80.001, 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.
Full coverage of tax and deficit debates: [ID:nN06200548]
Graphic: Tax proposal: record deficit, more growth
Graphic: U.S., European debt, deficit and bond yields
Graphic: Treasury sell-off: r.reuters.com/ruj29q
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 was flat at $1.3257 EUR=EBS. Analysts said its
failure to hold gains above $1.3400 this week suggests a probe
lower, with a sustained break of $1.3180 opening the way for a
test of $1.3060/50.
The European Commission welcomed Ireland's tough 2011
austerity budget, which received a first approval from
parliament, opening the way for international loans to start
flowing to Dublin. [ID:nBRU011201]
But investors will likely continue to sell the euro on any
bounce amid 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