* 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
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 [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 0.6 percent at 83.99 yen
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: [ID:nN07277043]
Full coverage of tax and deficit debates: [ID:nN06200548]
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
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
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)