FOREX-Euro claws higher but gains seen capped

* Spanish bond auction, ECB policy meeting awaited

* China inflation eases to 15-month low

* Commodity currencies edge down but underpinned

By Lisa Twaronite

TOKYO, Jan 12 (Reuters) - The euro struggled higher in Asia on Thursday, moving away from a fresh 16-month low hit overnight, but its gains were capped ahead of a bond sale by Spain that is seen as a test of confidence in Europe's ability to meet its funding needs.

The single currency edged up 0.2 percent to $1.2725, after earlier bouncing off support at $1.2700 ahead of an option barrier at $1.2650. It fell as low as $1.26615 on trading platform EBS in New York on Wednesday. Resistance is seen at the overnight high around $1.2790.

Against the yen, the euro added 0.2 percent to 97.80 yen , rising from a session low of 97.67 yen. Support is seen at an 11-year low of 97.28 set on Monday on EBS.

While speculative euro positions remain short, many Japanese exporters are said to be long euro, and are likely to sell into any upside moves.

"Regarding flows, Japanese manufacturers have huge positions in euro/yen, some at 110 yen, and they couldn't sell at these current levels," said Citibank Japan's chief strategist Osamu Takashima.

Earlier euro weakness helped drive the dollar index to a fresh 16-month peak at 81.493 on Wednesday, before it fell back to stand at 81.252.

Against the yen, the greenback held steady below 77.00 , at 76.84 yen.

Ahead of the Spanish auction, markets are closely watching the outcome of the European Central Bank policy meeting, a day after the head of sovereign ratings for Fitch warned the ECB should ramp up its buying of troubled euro zone debt to support Italy and prevent a "cataclysmic" collapse of the euro.

After two back-to-back interest rate cuts and last month's provision of nearly half a trillion euros in three-year loans, the ECB is seen keeping rates unchanged at a record low 1.0 percent.

That leaves Spain's debt auction on Thursday and Italy's bond sale on Friday as this week's major risk events. Spain will sell up to 5 billion euros of 2015 and 2016 paper. Italy will offer up to 4.75 billion euros of five-year bonds on Friday.

CHINESE DATA

Markets digested the latest inflation reading from China, which showed consumer price inflation slipped to 4.1 percent in December to its lowest level in 15 months. The headline figure was just ahead of market expectations of a cooling to 4.0 percent in the benchmark Reuters poll of economists, but kept intact the easing trend of the last five months and reinforced the view that the People's Bank of China is poised to ease monetary policy.

Commodity currencies including the Australian dollar took the Chinese data in their stride but edged down a bit, with the Aussie buying $1.0298, well above Wednesday's session low around $1.0263. Resistance lies at the trendline drawn from the Oct. 27 high around $1.0340, with the Tenkan line at $1.0266 serving as immediate support.

The New Zealand dollar hit a fresh two-month high at $0.7980 and was last at $0.7961.

Some traders said the market was starting to use the euro as a funding currency to buy commodities and higher yielding assets, thanks to the ECB's liquidity injections. This underpinned commodity currencies like the kiwi and Aussie.

Sterling edged down 0.1 percent to buy $1.5327, after thudding about 1 percent overnight against the greenback to a three-month low of $1.5308.

The Bank of England will announce the outcome of its Jan. 11-12 policy meeting on Thursday, and is expected to keep its quantitative programme unchanged.