* Solid Spain bond auction lifts euro to 5-mth high versus yen
* Euro stays close to 1-month peak against dollar
* China growth, other data in line with or above forecasts
* Dollar reaches 2-month high versus yen
By Jessica Mortimer
LONDON, Oct 18 (Reuters) - The euro hit a five-month high against the yen and hovered near a one-month high versus the dollar on Thursday, buoyed by solid demand at a Spanish bond sale and greater optimism on the global economy.
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.
The euro rose to 104.07 yen on EBS trading platform, its strongest since early May.
Against the dollar, the euro was steady on the day at $1.3104, but it stayed close to Wednesday's one-month peak of $1.3140. Traders reported large option expiries at $1.3100 which may influence trade, keeping the euro close to that level.
The euro's next target is the Sept. 17 peak of $1.31729.
"The euro is going up, the only question for now is if we are going to get above the previous high? If we break through $1.3180 that is a key level," said Geoff Kendrick, currency analyst at Nomura.
"The next level could be 1.33 next week following the Spanish regional elections," he said, referring to elections due to take place in Galicia and the Basque Country on Sunday.
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.
Elsewhere, a jump in U.S. bond yields after Wednesday's strong U.S. housing numbers helped the dollar to a two-month high against the yen of 79.37 yen.
The Japanese currency has also been under pressure on expectations the Bank of Japan will announce fresh stimulus.
But the euro's gains were tempered a little after German Chancellor Angela Merkel opposed rushing to give the ECB new powers on banking supervision before a January 2013 target date.
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.
The higher-yielding Australian dollar hit a three-week high of $1.0412.
The euro's recent gains have seen demand to hedge against its weakness wane, with one-month risk reversals showing the premium charged to buy bets on the euro falling has dropped to show only a slight bias for more weakness.
One-month euro/dollar risk reversals in favour of euro puts, or options betting on its weakness, traded at 0.15 vols, their lowest in two years. It stood at 2.4 vols in May when talk of a Greek exit from the euro was at its height.
Due to the euro's recent advance, the dollar index was near Wednesday's one-month low of 78.935, trading at 79.171. A break of the Sept. 14 low of 78.601 would take the index back to lows not seen since February.