* Euro resilient as Spain seen ready to seek aid despite PM’s comments
* Euro/Aussie hits 3 1/2-month high on yawning Australian trade deficit
* Yen hurt by debate on BOJ’s foreign bond buying
By Ian Chua and Hideyuki Sano
SYDNEY/TOKYO, Oct 3 (Reuters) - The euro steadied on Wednesday as traders tried to gauge how close Spain is to asking for European financial aid, while the Australian dollar slid to a four-week low after Australia posted its biggest trade deficit in 3-1/2 years.
The Aussie was also weighed down by expectations that domestic interest rates will be cut further, after Tuesday’s reduction in rates.
The euro was at $1.2905, little changed from late U.S. levels, having retreated from Tuesday’s one-week high of $1.2968 after Spanish Prime Minister Mariano Rajoy said an aid request was not imminent.
Still, the common currency remained well above a three-week trough of $1.28035 plumbed on Monday as many market players expect Spain to ask for help sooner or later.
“Rajoy has taken reform steps so he can apply for aid anytime he needs. That should discourage speculators from selling the euro too aggressively,” said Seiya Nakajima, chief economist at Itochu Corp, referring to Spanish Prime Minister Mariano Rajoy.
Rajoy, who announced belt-tightening measures in the 2013 budget last week, said on Tuesday he reached an agreement on fiscal consolidation with the regions, though he gave no details.
For now, the euro appeared to be carving out a trading range while markets wait for a move from Spain that would likely trigger the European Central Bank’s recently announced bond-buying programme.
The common currency was also helped after Moody’s said it would announce the results of its review o Spain’s sovereign debt rating some time this month, wrongfooting euro bears who had expected an imminent downgrade.
Spain stands to lose its investment grade rating if Moody’s decides to downgrade the country.
Traders said the resilience in the euro could partly be attributed to buying against the Australian dollar, which weakened all round after its August trade deficit blew out in August.
Falling prices for iron ore and coal ate into Australia’s export earnings, just the latest sign of how the resource-rich country is being hurt by the slowdown in China, it main customer.
Investors also dumped the Aussie dollar after the Reserve Bank of Australia (RBA) on Tuesday cut its cash rate by 25 basis points to 3.25 percent, the lowest in three years, and left the door open for more easing.
Justifying the cut, the RBA said China’s economic slowdown, falling export prices and a high local dollar all dimmed the economic outlook at home.
The euro soared to a 3-1/2 month high of A$1.2632 , a gain of nearly nine percent from a record low around A$1.1597 plumbed two-months ago.
Against the greenback, the Aussie fell another 0.4 percent after having posted its biggest one-day fall in more than two months the previous day.
The Aussie fell to as low as $1.0217, putting within sight a test on its Sept 6 low of $1.0165.
Further downside for the Aussie could be limited while the Federal Reserve and European Central Bank are busy trying to stimulate their own economies as well, diminishing the allure of both the dollar and euro.
“The AUD is not going to fall much further while the risk-friendly environment is in place but it remains a sell on rallies tactically, and vulnerable to any deterioration in sentiment,” analysts at Societe Generale wrote in a client note.
The yen also ticked down to its lowest level in nearly two weeks, with the U.S. dollar rising to as high as 78.31 yen .
Traders said they saw dollar buying by U.S. corporates, but limited fund outflows from Japanese investors after the start of their new financial half-year on Oct 1.
Increasing policy debate in Tokyo on whether the Bank of Japan should buy foreign bonds as a part of asset purchase programme is weighing on the yen, though market players see a remote chance of that happening in the near future.
In Europe, investors will get the latest reading on the services sector of the region’s major economies. Further signs of weakness could add more pressure on the ECB to cut interest rates on Thursday.
Still, officials have expressed enough concern about euro zone inflation to convince financial markets they will hold off cutting interest rates, already at a record low of 0.75 percent.