* Abe voted in as Japanese prime minister * BoJ minutes show some called for action if economy worsens * Euro hits 16-month high vs yen By Gertrude Chavez-Dreyfuss NEW YORK, Dec 26 (Reuters) - The yen dropped to a more than two-year low against the dollar on Wednesday, after Shinzo Abe assumed office as Japan's new prime minister and repeated his pledge to push for more drastic monetary and fiscal measures and tame the strong Japanese currency. Meanwhile the euro traded above $1.32 against the U.S. dollar for a seventh straight session and in midday New York trading was firmer on the day. Traders said the euro's gain was due to position adjustment going into the end of the year, with investors continuing to reduce short bets on the currency. The euro also surged to a 16-month high against the yen. Overall trading volume was thin with many global financial centers still closed for the Christmas holiday. All G10 markets except Japan were closed on Tuesday, with only Japanese and U.S. markets open on Wednesday. Hong Kong and Australia also remained closed on Wednesday. New Japanese prime minister Shinzo Abe said on Wednesday his government will pursue bold monetary policy, a flexible fiscal strategy, and a growth plan to encourage private investment . Abe, whose party won a landslide victory on Dec. 16, was elected prime minister by parliament's lower house on Wednesday. "The election of Abe has had a galvanizing effect on the dollar/yen exchange rate and he has been able to accomplish more in two months of jawboning than the BoJ has...over the past several years," said Boris Schlossberg, managing director of FX strategy at BK Asset Management in New York. The yen was further weighed down by comments from Japanese Finance Minister Taro Aso, who said on Wednesday he was instructed by Abe to loosen the limits on bond issuance under the stimulus package. Under Japan's stimulus plan, the debt issuance cap has been set at 44 trillion yen.. That suggested further yen weakness as Japan floods the market with its currency. Aso's remarks were one of the catalysts for the yen's drop to a more than two-year low in mid-morning trading. Also undermining the yen were minutes of the Bank of Japan's November policy meeting released on Wednesday which showed some board members considered policy options if the outlook for the economy and prices were to worsen. One board member even suggested that the BoJ commit to buying assets in an open-ended manner, without setting a strict deadline, until it achieved its 1 percent consumer inflation target. The U.S. dollar rose as high as 85.70 yen, its strongest level since mid-September 2010, breaking through resistance at its 200-week moving average around 84.95 yen. It last stood at 85.60 yen, up 1 percent on the day. The yen has fallen more than 10 percent against the dollar so far this year. BK's Schlossberg said dollar/yen could hit Abe's ultimate target of 90 yen if he continues to keep pressure on the BoJ to further loosen its stance. Against the yen, the euro rose as high as 113.39 yen, a 16-month high. It last stood at 113.17 yen, up 1.3 percent. Technical analysts cited little resistance above last week's high, with the euro's 200-week moving average still a good distance, around 115.00 yen. The European unit has not closed above that average since late Sept. 2008. The U.S. dollar index, meanwhile, was little changed at 79.632. On Tuesday, it rose as high as 79.780, its strongest level since Dec. 14. Ongoing concerns about the U.S. budget impasse continued to underpin the U.S currency. President Barack Obama may return to Washington from his Hawaiian holiday as early as Wednesday evening to address unfinished fiscal negotiations with Congress, according to an administration official. The next session of the U.S. Senate is set for Thursday, but the issues presented by the "fiscal cliff" of tax hikes and spending cuts scheduled to take effect next year were not on the calendar. The U.S. House of Representatives has nothing on its schedule this week, but its members have been told they could be called back on 48 hours notice, making their Thursday return a theoretical possibility. "Markets are in a stalemate with respect to the fiscal cliff," said Brian Daingerfield, currency strategist, at RBS Securities in Stamford, Connecticut. "Lawmakers aren't back yet and I think the headlines on the fiscal cliff will ramp up starting tomorrow." The euro traded at $1.3220, up 0.3 percent. "It has been year-end flows more than anything else for euro/dollar. It's extremely quiet and even small moves tend to get exaggerated," said Daingerfield.