* Euro firms as ECB holds rates, on strong Spain bond sale
* But market wary that ECB may hint at future rate cut
* ECB's Draghi news conference due at 1330 GMT
* BOJ easing expectations keep pressure on yen
By Jessica Mortimer
LONDON, Jan 10 The euro rose against the dollar and the yen on Thursday after the European Central Bank left interest rates on hold and following strong demand at an auction of Spanish debt.
Traders said the euro gained as some in the market had positioned for a small risk that the ECB may cut rates.
Still, market participants were wary that the ECB may signal further rate cuts in the coming months at a news conference from ECB President Mario Draghi at 1330 GMT.
The euro rose 0.4 percent to a session high of 1.3118, having broken above reported stop loss buy orders around $1.3110. This brought it closer towards a high hit on Tuesday of $1.3140.
"The euro could suffer if the ECB anticipates a rate cut in the future," said Asmara Jamaleh, currency strategist at Intesa Sanpaolo in Milan.
"But I think the falls will be short-lived because this would be likely to be the last rate cut and it could also help growth in the euro zone," she said, adding that she forecasts the euro to rise to $1.35 by the middle of 2013.
The euro extended earlier gains following solid demand at a sale of mostly two-year Spanish debt, which caused Spain's benchmark 10-year bond yields to fall to a 10-month low.
If increased concerns about the prospect of a rate cut push the euro lower, analysts said it has solid chart support around $1.30, with traders reporting demand from Asian central banks to buy the currency before that, at around $1.3040.
"The market is awaiting signals from the ECB over how serious it is on delivering further near-term policy easing. Depending on the rhetoric used in the press conference, the euro is either going to hold the $1.31 ground or to slip back towards $1.30," said Alexandre Dolci, FX strategist at BBVA.
"The Spanish bond auction was better than expected and that saw the euro rise," he added.
Against the yen, the euro rose 0.8 percent to hit a session high of 115.85 yen, bringing it close to an 18-month high of 115.995 yen hit in early January.
Elsewhere, sterling edged up marginally against the dollar after the Bank of England left interest rates and its quantitative easing target unchanged. It was last up 0.2 percent at $1.6052.
The dollar neared a 2-1/2-year high against the yen on Thursday, with the Japanese currency looking susceptible to further losses on increasing bets of easier policy by the Bank of Japan.
The dollar was up 0.4 percent on the day at 88.23 yen , not far from 88.48 yen hit on Friday, its highest level since July 2010. The yen gave up most of its gains earlier this week.
Data showing strong export growth in China also knocked the low-yielding yen as investors sought higher-yielding and growth-linked currencies like the Australian dollar, which rose to a four-month high versus the U.S. dollar and a four-year high against the yen.
"We can definitely see the trend of yen weakness continue," said Peter Kinsella, currency strategist at Commerzbank.
"Data for China last night was very good and that was good for risk in general and bad for safe-haven currencies, like the yen, which weakened on the back of that. The BOJ increasing its inflation target poses a further risk to the yen."
The Australian currency rose around 0.7 percent against the U.S. dollar to hit a high of US$1.0587.
Traders reported strong demand for options betting on further yen weakness, with one-month dollar/yen implied volatility - a measure of expected price movement - rising to its highest since March 2012.
One-month risk reversals showed demand to buy yen puts - or bets on the yen falling - gained sharply to 0.95, up from around 0.4 at the start of the week.
Yen moves will probably be volatile ahead of the BOJ's Jan. 21-22 policy meeting.