There are two main ways in which this might happen; "spoofing" and "hacking".
I've summarised briefly below via an edited (albeit somewhat repetitive) version of an AOL write-up.
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Spoofing happens when someone sends emails making it look like it they were sent from your account. In reality, the emails are sent through a spoofer's own server, not your server. They are manipulated to show your address in the "From" field to trick people into opening them and potentially infecting their accounts and computers.
Differences between hacked and spoofed
A compromised (hacked) account means someone else accessed (and used) your account by obtaining your password.
Spoofed email occurs when the "From" field of a message is altered to show your address, which doesn't necessarily mean someone else accessed your account.
You can possibly identify whether your account is hacked or spoofed with the help of your Sent folder.
• Your account has most likely been spoofed if you DO NOT find any strange email in your own Sent Folder.
• Your account has been compromised when you find email in your own Sent folder that you did NOT send.
Signs of a spoofed account
If you experience any of the signs below, it's likely your account is being spoofed. Please be aware that unrecognised emails in your sent folder is not a sign of a spoofed account and is an indicator that your account was hacked.
• Your contacts are receiving emails that you didn't send.
• You receive spam emails from your own email address.
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There does seem to be something more in your case, in that whoever sent the spam seems to know of a relationship between you and the receiver. I would suspect that one or other of your contacts have been compromised at some time, either by hacking or malicious software. You seem to have checked your own machine for the same, it is just as possible that (if you are in his contacts or mail in his inbox), the recipient might have been compromised.
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