The dollar rose above 116 yen for the first time in two years on Thursday as investors bought the currency on prospects that the interest rate gap between the United States and Japan would widen even further. After its break above 116 yen, the dollar eased as short-term players took profits following several failed attempts to pierce the key psychological level the past week, traders said. The euro, meanwhile, climbed as traders covered short positions and on rising expectations the European Central Bank could raise rates next year on a brightening outlook for growth in the euro zone and amid concerns about inflation. The single currency hit a six-month high against the yen. "There is a sense of accomplishment in the market, having succeeded in boosting the dollar above the key 116 yen level," said Junya Tanase, forex strategist at JPMorgan Chase Bank. "The dollar may not advance strongly from current levels amid a lack of fresh evidence that interest rates will keep rising, but its floor looks firm at 115 yen," he said. Traders said the dollar was also supported by a rise in the benchmark 10-year U.S. Treasury note's yield to a seven-month high just above 4.60 percent on Wednesday. Higher yields boost the attractiveness of holding U.S. debt. "Market players are almost certain that the Federal Reserve will keep raising interest rates and as long as the prospect of higher U.S. rates remains intact, dollar buying will continue," said Mitsuru Sahara, senior trader at UFJ Bank. The Fed's policy-making board next meets on Tuesday and is widely expected to raise the key rate to 4 percent from the current 3.75 percent. The market has already factored in another increase in December, traders said. By 0300 GMT, the dollar was buying 115.70, down from the 25-month high of around 116.25 yen hit earlier in the session, and slightly lower than late New York levels. The euro was at $1.2095, up from around $1.2070 in late U.S. dealsThe single currency was trading at 139.95 yen after rising to a six-month high around 140.05 yen. Traders said that the dollar could face resistance around 116.30 yen, with options seen lined up at 116.50 yen and 117 yen, but it would likely resume its climb once those barriers were cleared. Traders said the dollar's upside potential looked greater than that of the yen despite expectations the Bank of Japan could end its super-easy monetary policy next year and eventually raise rates. The Fed has raised rates 11 times since June 2004, lifting the fed funds rate above the euro zone's benchmark rate of 2 percent and well above the near-zero percent rate in Japan. "There is uncertainty about the pace of the Fed's tightening campaign in 2006. But given a clear advantage in interest rate differentials, investor preference for the dollar will not change," said Sahara at UFJ. Even if the Fed stopped its hikes, the huge gap between U.S. and Japanese rates would still offer incentive for Japanese individuals to buy U.S. bonds, keeping support firm for the dollar, traders said. Japanese government data released on Thursday showed that Japanese investors bought a net 649 billion yen of foreign bonds last week, up from 190.4 billion yen the week before. "It's looking more like yen weakness," said Kikuko Takeda, a currency analyst at Bank of Tokyo-Mitsubishi.