* Small caps surge as Trump proposal slashes taxes on businesses
* Dollar rises on hawkish Fed, strong data
* Tech, financials lead Wall Street up; Europe shares rise
* U.S. 2-year yield hits highest since 2008 (Updates with close of U.S. market)
By Lewis Krauskopf
NEW YORK, Sept 27 (Reuters) - The dollar on Wednesday climbed to a one-month high against a basket of currencies, while financial stocks and Treasury yields rose after strong economic data helped boost expectations for a U.S. Federal Reserve interest rate hike in December.
U.S. small-cap stocks rallied on the expectation of lower taxes, tallying their biggest single-day gain since March.
President Donald Trump proposed the biggest U.S. tax overhaul in three decades, offering to cut taxes for most Americans but prompting criticism that the plan favors the rich and companies and could add trillions of dollars to the deficit.
“For the first time since we have had Trump and the administration in office, it looks like there is incrementally more of a possibility of tax reform going through that would actually be meaningful," said Thomas Martin, senior portfolio manager at GlobAlt Investments in Atlanta, Georgia.
Bets on another interest rate hike before the year ends firmed following Tuesday comments from Federal Reserve Chair Janet Yellen, who said the U.S. central bank needs to continue gradual rate hikes despite broad uncertainty about the path of inflation.
Data showed new orders for key U.S.-made capital goods increased more than expected in August, pointing to strength in the economy despite an anticipated drag to growth from massive hurricanes.
Perceived chances of a hike at the Fed's December meeting hovered around 80 percent on Wednesday from 72 percent on Monday, according to the CME Group's FedWatch tool.
The hawkish rate sentiment helped fuel S&P 500 financial shares, which gained 1.3 percent. The S&P 500 tech sector rose 1.1 percent, helped by an 8.5 percent surge in shares of Micron Technology after the chipmaker's better-than-expected quarterly earnings report.
On Wall Street, the Dow Jones Industrial Average rose 56.39 points, or 0.25 percent, to 22,340.71, the S&P 500 gained 10.2 points, or 0.41 percent, to 2,507.04 and the Nasdaq Composite added 73.10 points, or 1.15 percent, to 6,453.26.
“The renewed interest in technology coupled with the likelihood of higher interest rates spurring an interest in financials, then the news on tax reform progressing, are all positive catalysts" for U.S. equities, said Alan Lancz, president of investment advisory firm Alan B. Lancz & Associates Inc in Toledo, Ohio.
The Russell 2000 small-cap index rose 1.9 percent and hit a record high.
The pan-European FTSEurofirst 300 index rose 0.40 percent and MSCI's gauge of stocks across the globe gained 0.17 percent.
European banks rose 2 percent and hit their highest in seven weeks.
The dollar index rose 0.5 percent, with the euro down 0.37 percent to $1.17470.
"It really is an extension of the rally kicked off by the Fed last week," said Mazen Issa, senior FX strategist at TD Securities in New York, referring to the Fed's meeting where it signaled it may raise rates for a third time this year.
Benchmark 10-year notes last fell 21/32 in price to yield 2.3032 percent, from 2.229 percent late on Tuesday.
Yields on the 2-year note rose to as high as 1.483 percent, the highest since November 2008.
Brent crude futures slipped from 26-month highs, while U.S. crude rallied, after crude stockpiles in the world's top oil consumer unexpectedly drew down with refiners coming back online following Hurricane Harvey last month.
U.S. crude rose 0.33 percent to $52.05 per barrel while Brent was last at $57.70, down 1.27 percent on the day.
Spot gold dropped 0.8 percent to $1,283.07 an ounce.
Additional reporting by Chuck Mikolajczak, Rodrigo Campos, Saqib Iqbal Ahmed and Dion Rabouin in New York and Nigel Stephenson in London; Editing by James Dalgleish and Nick Zieminski