* Boehner says Obama budget offer "not there yet" * Scope for year-end demand to test March high near $1.34 * Yen vulnerable to easing expectations By Gertrude Chavez-Dreyfuss NEW YORK, Dec 18 (Reuters) - The euro rose to its highest in more than seven months against the dollar and hovered near a nine-month peak versus the yen on Tuesday as signs of progress in U.S. budget negotiations lifted overall market sentiment. Market players sold the safe-haven dollar on optimism U.S. policymakers can reach a deal to avoid the "fiscal cliff," a combination of tax hikes and spending cuts that risks tipping the world's largest economy back into recession next year if it is not headed off. The dollar index dropped to a two-month low. U.S. President Barack Obama on Monday made a concession, agreeing to allow the extension of low income tax rates begun during President George W. Bush's administration for incomes up to $400,000 per household. He had previously insisted setting that cut-off at $250,000. In response, U.S. House of Representatives Speaker John Boehner said on Tuesday Obama's budget deal offer "is not there yet" but he still hopes he can reach an agreement with the White House. "This marked a dramatic departure from the exaggerated saber-rattling between Obama and Boehner just two weeks ago," said Ravi Bharadwaj, market analyst at Western Union Business Solutions in Washington. A U.S. fiscal deal is viewed as positive for risk-taking and should benefit riskier currencies such as the euro at the expense of the dollar. Euro gains helped push Spanish and Italian yields lower and boosted demand for European shares. Some strategists said year-end investment flows could help the euro extend its gains to test the late-March high just below $1.34, although concerns about the euro zone's weak growth outlook may leave it vulnerable to selling in the new year. The euro was last up 0.5 percent on the day at $1.3223 after hitting a high of $1.3232, its strongest level since early May. Traders said investors took out option barriers at $1.32, prompting more euro buying. The dollar index fell to a two-month trough of 79.260. The index was last quoted at 79.320, down 0.3 percent. The Swedish crown rose against the euro to 8.7080 per euro after the Riksbank cut its repo rate by 25 basis points as expected but said rates would remain on hold for some time. The outlook wrong-footed some investors who had positioned for a hint of further cuts in future. The euro was last down 0.4 percent at 8.7249 crowns. BOJ IN FOCUS The yen slid against the euro, with the single currency rising 0.6 percent on the day to 111.09 yen, within sight of a nine-month high of 111.30 yen hit on Monday. The Japanese currency tumbled after the Liberal Democratic Party surged back to power in an election on Sunday, fuelling expectations the new government will drive the Bank of Japan towards more aggressive monetary easing. The dollar was up 0.2 percent at 84.02 yen, having hit a high of 84.48 yen on Monday, its strongest since April 2011. Traders cited option barriers at 84.50 yen with stop-loss buy orders above that level. "The outlook for more political pressure on the Japanese central bank is decidedly negative for the yen," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington. "However, having shed over five percent of its value against the dollar in the last month alone, the yen may be poised for a bit of a bounce." Analysts said a recovery in the yen could happen if the BoJ disappoints those expecting more aggressive monetary easing. The bank holds a two-day policy meeting Wednesday and Thursday. Speculators have sold the yen on expectations the BoJ could adopt a more aggressive asset-buying program. But sources familiar with the BOJ's thinking have said the most likely option is for the central bank to increase its asset-buying and lending program, currently at 91 trillion yen, by another 5-10 trillion yen. That would fall short of expectations and could lead to some of the large short yen positions being cut.