Dec 19 (Reuters) - The euro extended gains on Wednesday to hit a 16-month high against the yen and a 7-1/2 month peak versus the dollar bolstered by slightly better German business confidence data. The euro's gains pushed the dollar index to its lowest in two months. The dollar also fell to a 7-1/2 month low against the Swiss franc of 0.9107 francs. The euro rose to 111.93 yen as long term investors and speculators bought the single currency before the year end and sold the Japanese yen on expectations that the Bank of Japan will ease monetary policy aggressively in coming months. The euro hit a high of $1.3273 against the dollar as tentative signs of progress in U.S. budget talks also helped improve market sentiment.

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