FOREX-Euro bounces back from 2-week low after Spain budget
* Spain's budget soothe market jitters for now
* Moody's review on Spain's ratings in focus
* Market still sceptical euro zone can act swiftly
* Commodity currencies fight back, AUD helped by China hopes
By Ian Chua and Hideyuki Sano
SYDNEY/TOKYO, Sept 28 (Reuters) - The euro held firm above a two-week low on Friday after Spain unveiled a crisis budget that many saw as a step towards a bailout to stabilise its public finances.
The single currency looks set to end the quarter with a small gain, but is likely to stay under pressure in the coming quarter, with many pitfalls ahead, not just in Spain, now beset by anti-austerity protests and a secession threat, but also in Greece, where the whole debt saga started.
"I expect the euro to gradually decline. There's a risk of credit downgrade on Spain. The talk between Greece and the troika may get nowhere. And the euro zone economy will be fragile," said Minori Uchida, chief currency analyst at the Bank of Tokyo-Mitsubishi UFJ.
The euro stood at $1.2934, up slightly from late U.S. levels after having bounced from a two-week low of $1.2828 on Thursday, with its 200-day moving average around $1.2825 serving as a substantial support.
The currency is up 2.1 percent on the quarter, thanks largely to hopes that Spain's borrowing costs would be brought down when the European Central Bank starts buying Spanish debt, a programme that needs Spain's request for a bailout to be activated.
Initial resistance for the euro is seen at $1.2960, the 38.2 percent retracement of its Sept 17-27 slide.
Spain also announced a timetable for economic reforms that EU Economic and Monetary Affairs Commissioner Olli Rehn says goes beyond what the European Commission required.
All this is widely seen as paving the way for eventually seeking a bailout. Madrid is talking to EU authorities about the terms of a possible aid package.
Analysts warned there are still many hurdles ahead and said the news merely gave markets an excuse to book profits on recent bearish trades.
"I think it's positive that Spain is laying the groundwork for a bailout. But we still hear disharmony between the euro's "northern league" and the south, leaving markets still unsure how seriously they are trying to support," said Ayako Sera, senior market economist at Sumitomo Mitsui Trust Bank.
Prime Minister Mariano Rajoy is resisting market and diplomatic pressure to apply for a rescue, partly out of concern for national sovereignty but also because European Union paymaster Germany insists Spain doesn't need help.
The Spanish budget also goes to parliament on Saturday and debates could last weeks. Spain's 17 autonomous regions still must present budgets and find an additional 5 billion euros in adjustments to meet overall public deficit reduction goals.
"The budget represents two steps forward and one step back, which is why the euro only moved slightly higher," said Mary Nicola, a strategist at BNP Paribas.
Markets are now waiting for Moody's review of Spain's sovereign rating, due at the end of the month. On Thursday, ratings agency Egan-Jones cut Spain's sovereign rating further into junk status, citing the country's faltering banks and struggling regional governments.
The euro also rose on the yen, pulling up to 100.31 from a two-week low of 99.64 plumbed Thursday.
The greenback, however, softened against the Japanese currency, slipping to as low as 77.52, its lowest in two weeks, not least because of Japanese repatriation at the end of financial half year on Sept 30.
Among the biggest gainers were commodity currencies, which had been hit hard in the past few sessions. The Australian dollar climbed as high as $1.0474, more than one full cent above a two-week trough of $1.0328 set mid-week.
Resistance is seen at $1.0476, the 50 percent retracement of its Sept 14-26 fall, ahead of $1.0512 and then the Sept 14 peak of $1.0625.
Partly helping the Aussie is renewed hopes that China, Australia's single largest export market, will deliver more stimulus to stem its economic slowdown.
A Chinese central bank adviser said on Thursday that Beijing had severely underestimated this year's global economic slowdown and further cuts to interest rates or bank reserve requirements hinge on any new deterioration in the external environment.