(Reuters) - Oil rebounded towards $89 on Thursday as the dollar weakened and some optimism returned to stock markets in Asia on hopes that the extension of U.S. tax cuts would boost consumption. U.S. crude for January rose as much as 1 percent to $89.20 a barrel and was up 55 cents at $88.83 a barrel at 0416 GMT. The front-month contract touched a 26-month high of $90.76 on Tuesday and fell 41 cents on Wednesday, pulled lower in part by concerns about a growing U.S. deficit. ICE Brent crude added 24 cents to $91.01. The financial world is becoming split between investors who are deeply concerned that a proposal from U.S. President Barack Obama to extend tax cuts will worsen a budget shortfall, and investors who are relieved that U.S. authorities are trying to use fiscal and monetary medicine for the economy. Oil markets over the past 24 hours have shifted from focusing on the first scenario to paying more attention to the rosier picture painted by the second one. "When you have rising stock markets, you have the wealth effect; consumers feel richer so their pocket books open up. That's also positive for oil demand," said Tony Nunan, a risk manager with Tokyo-based Mitsubishi Corp. "People are now more comforatable with the overall economic picture. This is a buying opportunity." A rising trend has been confirmed for U.S. crude from a technical perspective, Nunan said, adding: "I thought that at $90 it was going to struggle and it would become some resistance, but it just whooshed through it." The front-month contract on Tuesday for the first time surpassed $89.84, the 50 percent Fibonacci retracement from the July 2008 record of $147.27 to the December 2008 low of $32.40. Although prices fell later in the day, the correction was limited. FOCUS ON CHINA RATES A report that inflation in China in November was lower than expectations of 4.7 percent in a Reuters poll also reassured markets that an interest rate increase by the world's second-largest oil consuming economy may not be in the offing. "The worry over that to me seems to be a little bit unfounded. For me, that is the right thing to do, the concern is that they would overdo it," Nunan said. China's annual inflation in November is likely to have been "a little bit" higher than October's 4.4 percent, but will be lower than market expectations, the official Securities Times reported, citing unnamed authoritative sources. The statistics will be published on Saturday. The Standard & Poor's 500 Index on Wednesday closed at its highest level since September 2008, while Japan's Nikkei average on Thursday climbed to a fresh seven-month high.

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