FOREX-Italy debt sale lifts euro, yen gains vs dollar after BOJ

* Euro up versus dollar after Spanish Q3 GDP report

* Italy debt auctions also help euro

* Yen hits one-week high vs dollar

* BOJ eases policy, but some had expected more

* Volumes below typical after Hurricane Sandy strikes U.S. East Coast

NEW YORK, Oct 30 (Reuters) - The euro rallied against against the dollar and yen on Tuesday after data showed the Spanish economy contracted slightly less than expected in the third quarter and Italy's borrowing costs fell at a sale of five- and ten-year debt. The yen rose against the dollar on Monday after monetary easing steps from the Bank of Japan disappointed investors who had positioned for a more aggressive increase in asset purchases. Though trading moves were exacerbated earlier in the New York day by lighter than usual volume as U.S. trading desks were only thinly staffed after one of the biggest storms ever to hit the United States battered the eastern seaboard, it did pick up as the session progressed. ``Slightly better than expected Spanish GDP in the third quarter gave the euro a bit of a bounce,'' said Joseph Trevisani, chief market strategist at Worldwide Markets in Woodcliff Lake, New Jersey. ``That was complemented by a reasonably successful Italian bond auction.'' The euro was last up 0.5 percent at $1.2964, still close to the session peak of $1.2983. The euro was bid after data showed the Spanish economy contracted for a fifth straight quarter in the three months to September at a slightly slower rate than forecast.

It was also helped by improved demand at an Italian debt auction. ``There's been a little bit of speculative buying of euro/dollar because the Spanish GDP data was not so bad as feared,'' said Paul Bednarczyk, head of research at 4CAST in London. Some $4.1 billion in euros has changed hands so far on the last Tuesday of October, compared with $4.87 billion for the entire session on the last Tuesday of September, according to Reuters Dealing. A report showing U.S. single-family home prices rose in August, the latest sign that the housing market is on the mend, also bolstered risk appetite and demand for the euro. 1/8ID:nN9E8KR00S 3/4 The data is ``unlikely to obstruct the Fed's quantitative easing, which is largely aimed at sending the unemployment rate down towards 7 percent,'' said Ashraf Laidi, chief global strategist at City Index in London. Gains for the euro looked likely to be capped by concerns about whether Greece can agree to a deal on more austerity, and uncertainty over when Spain might request financial aid. Spanish Prime Minister Mariano Rajoy said on Monday he would seek a credit line from the euro zone's rescue fund ``when I think it is in the interests of Spain''. Still, expectations the European Central Bank will start a bond buying programme after Madrid asks for a bailout limited any speculative euro selling.

BOJ MOVES The BOJ increased its monetary stimulus for a second month running, this time by 11 trillion yen ($138.5 billion). The yen gained after this, with traders saying there had been speculation of a bigger move. ``Dollar/yen dove through the 79.50 level in the wake of the BOJ announcement on quantitative easing that disappointed the markets,'' said Boris Schlossberg, managing director of FX strategy at BK Asset Management in New York. ``Many traders were hoping that Japanese monetary officials would deliver a bigger boost.'' The dollar hit a one-week low of 79.25 yen, breaking below important chart support at the 200-day moving average. It was last down 0.2 percent on the day at 79.62 yen. Friday's four-month peak of 80.36 was expected to act as resistance for the dollar. The euro also fell to a two-week low against the yen before reversing course to trade 0.3 percent higher at 103.24 yen mostly due to cross trading as the euro rallied against the dollar. Strategists said it was too early to tell what impact the destruction caused across the Atlantic by the giant storm Sandy might have on currency markets. Demand for the dollar tends to rise in times of reduced appetite to take on risk, but if widespread damage prompted speculation the Fed might ease policy further to shore up the economy, the dollar could fall. While Wall Street and the U.S. bond cash market stayed shut with many traders in the tri-state area homebound, futures on U.S. Treasuries and short-term interest rates changed hands, albeit on unusually light volume. The encouraging report on U.S. home prices from S&P/Case-Shiller added some selling pressure on T-note and rates contracts. The Dec 10-year Treasury note futures last traded down 5/32 at 132-20/32.