* Germany's Ifo business sentiment index hits record high
* Merkel's CDU seeks grand coalition with SPD
* Dollar lacks momentum of its own with eyes on Powell, tax plans
TOKYO, Nov 27 (Reuters) - The euro hit a two-month high versus the dollar and held firm against other major currencies on Monday thanks to strong German business confidence and reduced anxiety about political instability in Europe's biggest economy.
The euro fetched $1.1929, little changed from late U.S. levels last week after having hit a high of $1.1946, its highest level in two months.
The common currency has gained 3.2 percent since it slumped to a 3-1/2-month low of $1.1553 earlier this month.
Against the yen, the euro rose to 133.24 yen, its highest since Nov 16 while it also firmed on the British pound to 0.8978 pound, edging near this month's peak of 0.9014.
The German business confidence index compiled by Ifo economic institute hit a record high in November, in another sign of strong growth in the euro zone's largest economy.
The upbeat data was followed by positive developments on the political front after German Chancellor Angela Merkel - whose fourth term was plunged into doubt a week ago when three-way coalition talks with the pro-business Free Democrats (FDP) and Greens collapsed - was handed a political lifeline by the Social Democrats (SDP).
That helped ease worries about political instability in the country as Leaders Merkel's conservative party agreed on Sunday to pursue a "grand coalition" with the SPD.
In contrast, the dollar lacked momentum of its own as persistently low inflation is seen as undermining the case for the Federal Reserve's rate hikes.
Market players are looking to the Congressional hearing on Fed Chair nominee Jerome Powell on Tuesday.
President Donald Trump's tax reforms plan is also in focus. Trump is due to meet Senate Republicans on Tuesday to discuss the party's efforts to pass tax reform legislation.
"First the Republicans have to agree on a plan between the Senate and the House of Representatives. Then that plan would need to be approved by the both chambers. That would need a considerable time and efforts," said Shin Kadota, senior strategist at Barclays.
The dollar index stood flat at 92.816, near two-month low of 92.675 touched on Friday.
Against the yen, the dollar traded at 111.60 yen, off Thursday's two-month low of 111.07.
Sterling fetched $1.3325, holding near Friday's two-month peak of $1.3360. (Editing by Shri Navaratnam)