* Graphic: World FX rates in 2017 tmsnrt.rs/2egbfVh
By Saikat Chatterjee
LONDON, Dec 8 (Reuters) - The dollar rose against a trade-weighted basket of its rivals on Friday, on track for its biggest weekly rise in nearly six weeks as optimism grows that a U.S. tax bill will pass.
Sterling was the only exception, gaining against a swathe of currencies amid relief that Britain and the European Union had struck a deal on Friday that will allow a second phase of talks to begin on the British exit from the EU.
The dollar index, which gauges the U.S. currency against a basket of six major rivals, was up 0.2 percent on the day at 93.961, up more than 1 percent for the week, its biggest rise since late October.
U.S. Senate Republicans agreed to talks with the House of Representatives on sweeping tax legislation on Wednesday, amid early signs that lawmakers could bridge their differences and agree on a final bill before self-imposed Dec. 22 deadline. .
Passage of the tax bill and strong data would strengthen the case for more U.S. rate increases in the next year, a possibility which bond markets look unprepared for. The Federal Reserve is set to raise interest rates next week, but futures markets expect less than two rate hikes over the next year.
“The market is behind the curve on interest rate hike expectations and that should start to catch up next year,” said Adam Cole, chief currency strategist at RBC Capital Markets in London.
Forex traders were also awaiting the U.S. non-farm payrolls report later in the day, which is expected to show 200,000 new jobs were created in November, according to a Reuters poll.
Sterling was the big outperformer in early trading, with the currency jumping to a six-month high against the euro and a 1 1/2-year high against the Japanese yen. It rose 0.3 percent against the dollar.
Britain and the EU reached an agreement on Friday to move on to talks about trade and a transition period after they outlined their separation, easing pressure on Prime Minister Theresa May .
For Reuters Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets
Reporting by Saikat Chatterjee, additional reporting by Lisa Twaronite in Tokyo, editing by Larry King