(Reuters) - The euro rose against the dollar on Thursday, buoyed by a solid auction of Spanish debt, with gains accelerating as comments made by European Central Bank President Mario Draghi calmed investors. The euro zone common currency showed little reaction to the ECB keeping rates on hold at 1 percent but Draghi's remarks at a news conference had investors scrambling to cover short positions. Draghi said the ECB stands ready to act if needed and said job creation should be one of the main objectives for economic policies in euro zone countries. The euro/dollar reacted very positively to Draghi's comments with the pair squeezing higher through the $1.2800 level. That is because investors took solace in Draghi's assurances that the credit markets were stabilizing, according to Boris Schlossberg, head of research at GFT Forex in Jersey City, New Jersey. "The pair has been grossly oversold leaving it vulnerable to a short squeeze in the near term. However any further upside progress may be limited unless the broader risk appetite improves." The single currency was last 0.9 perfect higher on the day at $1.2812, having touched a session high of $1.2838, according to Reuters data. That is up sharply from a 16-month low of $1.2661 hit on Wednesday. Many in the market consider its rise a correction from the heavy sell-off of past weeks. Spain and Italy conducted solid debt auctions at sharply lower borrowing costs in 2012's first real test of appetite for debt from the euro zone's bruised periphery. Italy will launch its 2012 bond issuing campaign on Friday when it offers up to 4.75 billion euros of debt including its three-year benchmark and two off-the-run issues. The glut of ECB money may well give that sale a fair wind too. Yields on benchmark 10-year yields on Spanish and Italian debt fell after the auctions, extending this week's slide and retreating from near levels at which other euro zone countries requested debt bailouts. "We've seen a nice lowering trend in the three days in Spanish and Italian yields, and the market is pricing in a more positive tone to bond markets at the periphery," said Steven Saywell, currency strategist at BNP Paribas. "So given that the euro has been under quite a bit of pressure in the past few weeks, we're seeing a slight repricing." EURO OUTLOOK SHAKY Despite the solid demand at the debt auction traders said the overall bias remained for more downside for the euro, especially if U.S. economic data disappoints and spurs risk aversion. U.S. data On Thursday showed initial claims for jobless benefits hit a six-week high and retail sales rose at the weakest pace in seven months in December. Growing pessimism about the ability of European officials to agree on a permanent solution to debt problems plaguing the region has prompted a heavy selloff in the euro in past months. On Thursday the head of sovereign ratings for Fitch said Italy faces a "material risk" of being downgraded by the end of the month although the government should be able to raise the funds it needs on debt markets. Euro/dollar gains nudged the dollar 0.6 percent lower versus a currency basket to 80.828 .DXY, but within sight of 81.49 hit on Wednesday, its highest in 16 months. Against the yen, the dollar was down 0.2 percent at 76.72.

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