* Yen hits lowest level vs euro since August 2011
* BOJ kicks off 2-day meeting, expected to ease policy
* Progress in U.S. fiscal talks boost hopes of a deal
* Euro hits 7-1/2-month high vs the dollar
By Masayuki Kitano
SINGAPORE, Dec 19 The yen hit a 16-month low against the euro on Wednesday, weighed down by expectations the Bank of Japan will unveil more monetary stimulus on Thursday, after a two-day policy meeting.
The euro hit its strongest level against the yen since August 2011 and also touched a 7-1/2-month high versus the dollar, as tentative signs of progress in U.S. budget talks helped bolster demand for riskier assets.
The euro rose to as high as $1.3256 on trading platform EBS, its strongest level since early May. It last changed hands at $1.3246, up 0.1 percent on the day.
Against the yen, the euro rose to as high as 111.78 yen as of 0626 GMT, its highest level in about 16 months.
With the yen dented by expectations for more BOJ monetary easing, the dollar edged up 0.2 percent to 84.35 yen. That was close to the dollar's high of 84.48 yen hit on Monday, the greenback's strongest level in 20 months.
Persistent yen-selling interest from non-Japanese players in the dollar against the yen, as well as in cross/yen pairs, has helped to drag the yen lower, said Jesper Bargmann, Asia head of G11 spot FX for RBS in Singapore.
"We've seen renewed interest in dollar/yen," he said, adding that there were continued expectations that a new Japanese government would keep putting pressure on the Bank of Japan.
The yen skidded on Monday after Japan's conservative Liberal Democratic Party (LDP), which is committed to aggressive monetary easing, won a landslide election victory.
The dollar is likely to stay supported against the yen ahead of the BOJ's policy decision on Thursday, traders said.
"I don't think we're going to break back down through 83.70 before the BOJ announcement tomorrow," said Bargmann at RBS.
In addition to speculation that the BOJ might ramp up monetary easing in coming months, a deterioration in Japan's trade balance has also contributed to the recent bearish sentiment against the yen.
The latest data showed that Japan's trade balance came to a deficit of 953.4 billion yen in November.
While that deficit was smaller than what economists had expected, it was the fifth straight month of deficits and was the largest trade deficit since January.
The yen showed little reaction to the data during Wednesday's Asian trade.
The BOJ kicks off its two-day meeting on Wednesday and is under intense political pressure to expand its monetary stimulus.
Fourteen of 19 economists polled by Reuters last week said they expected the BOJ to ease this week, most likely by increasing its 91 trillion yen ($1 trillion) asset buying and lending programme by up to 10 trillion yen.
In addition, there is also some focus on whether the BOJ will make any tweaks to its inflation goal, said a trader for a Japanese bank in Singapore.
"There are some expectations that something related to an inflation target might come out," he said.
On Tuesday, Japan's next prime minister, Shinzo Abe, had made a rare direct push for a higher inflation target to BOJ Governor Masaaki Shirakawa, calling on the BOJ to consider establishing a 2 percent inflation target, double the central bank's current price goal.
Several sources familiar with the BOJ's thinking have said the central bank will consider no later than January whether to adopt a 2 percent inflation target.
Optimism for a deal to avert a looming U.S. fiscal crisis has grown after President Barack Obama made a concession with his offer to limit tax increases to incomes exceeding $400,000 per household, a higher threshold than what the president had sought earlier.