Euro cheered by Spain's debt auction

The map of Europe is featured on the face of a two Euro coin seen in this photo illustration taken in Rome, December 3, 2011.

SYDNEY (Reuters) - The euro held near two-week highs against the dollar and yen in Asia on Friday, having extended its short-covering rally overnight after successful bond sales in Spain and France boosted risk sentiment.

Whether that positive market mood will persist in Asia depends on HSBC's preliminary report on China's manufacturing activity for January due at 0230 GMT. Any major disappointment could dampen appetite for riskier assets.

The single currency climbed as high as $1.2972, putting even more distance from a 17-month trough around $1.2623 plumbed a week ago. It last traded at $1.2968, on track to end the week up about 2.5 percent.

Against the yen, it bounced to 100.03 before settling at 99.95 yen, well off an 11-year trough of 97.00 set on Monday.

Traders said the market was still keeping an eye on Greece's negotiations with creditors on a debt swap. Any positive news there could see investors continue to cut bearish positions in the single currency.

"Expectations are seemingly running high for some sort of outline deal being reached as early as Friday between Athens and the country's major (not all) bondholders and ahead of Monday's euro group finance ministers meeting," BNP Paribas analysts wrote in a client note.

"If news headlines validate this view, there is every chance the euro will move higher still."

For now though, traders warned the euro was still in a downtrend, and only a break above the October low at $1.3144 would suggest an interim base has formed.

Further gains in the euro drove the dollar index .DXY to two-week lows at 80.041, well off a 16-month peak of 81.784 set a week ago.

The euro also powered higher against commodity currencies. It rose to A$1.2453, off a record low of A$1.2220 set on Tuesday.

Against the greenback, the Australian dollar was at $1.0417, still near an 11-week peak of $1.0450 set on Tuesday. This is not a bad performance, especially after Thursday's disappointing employment report.

Spain passed its biggest test of market sentiment on Thursday, selling more longer-term debt than hoped. France's debt auction also drew strong demand, signaling that markets have largely shrugged off last week's salvo of euro zone rating downgrades from Standard & Poor's.

(Editing by Ed Davies)