* Solid Spain bond auction lifts euro to 5-mth high versus yen
* Euro falls against dollar but still close to 1-month peak
* China growth, other data in line with or above forecasts
* Dollar reaches 2-month high versus yen
NEW YORK, Oct 18 The euro fell against the dollar on Thursday as uncertainty surrounding the U.S. job market overshadowed favorable demand at a Spanish bond sale.
The single European currency rose to a 5-month high against the yen after Spain sold more debt than it planned and its funding costs fell, causing its bond yields to fall as views on the country, which hung on to its investment-grade credit rating earlier this week, improved.
But as the U.S. session opened, data showed the number of Americans filing new claims for unemployment benefits rose last week, reversing a sharp decline in the prior week but still pointing to a labor market that is slowly healing.
"Jobless claims reverted to trend at 388,000, last week's large drop was statistical," said Joseph Trevisani, chief market strategist at Worldwide Markets, Woodcliff Lake in New Jersey. "Improvement in the labor market will continue to be fitful and slow."
The euro rose to 104.07 yen, its strongest since early May and remained close to that peak, last trading at 103.92 yen, up 0.3 percent.
Against the dollar, the euro fell 0.1 percent on the day to $1.3103, though within striking distance of Wednesday's one-month peak of $1.3139. Traders reported large option expiries at $1.3100 which may influence trade, keeping the euro close to that level.
"The easing of Spanish yields should provide a double boost to the Iberian economy as it decreases funding costs while at same time allowing the government to make smaller cuts in fiscal spending," said Boris Schlossberg, managing director of foreign exchange strategy at BK Asset Management in New York.
Some US$3.607 billion in euros changed hands using Reuters Dealing on Thursday.
Still, investors continue to anticipate that Spain will request a bailout in the coming weeks, prompting the European Central Bank to step in and buy its bonds, which would also lift the euro.
At the same time, euro bids from sovereign investors were reported at $1.3080 and expected to limit any falls in the currency.
"We are expecting some more upside in the euro as investors seem to get comfortable with the timeline about when Spain will seek a bailout and the ECB's bond buying will be triggered," Beat Siegenthaler, currency strategist at UBS.
"At the same time the global picture is also improving given the Chinese and the U.S. data."
A raft of data from China was either in line with or better than expectations, helping the euro and riskier assets. Growth in the third quarter was 7.4 percent from a year earlier, in line with a Reuters poll.
And Wednesday's strong U.S. housing numbers continued to help the dollar against the yen with the U.S. currency climbing to a two-month high against the yen of 79.36 yen.
The Japanese currency has also been under pressure on expectations the Bank of Japan will announce fresh stimulus.
The higher-yielding Australian dollar hit a three-week high of $1.0412.