September 28, 2012 / 11:21 AM / 7 years ago

FOREX-Spain budget lifts euro but gains seen muted

* Spain’s budget provides relief to euro

* Gains may be limited with Moody’s review on Spain due

* Uncertainty over Spain aid request remains

* Dollar recovers from 2-week low versus yen

By Jessica Mortimer

LONDON, Sept 28 (Reuters) - The euro rose against the dollar on Friday, recovering from a two-week low, after Spain unveiled on Thursday a budget that many saw as laying the groundwork for an application for financial aid.

Analysts said the euro’s gains may be limited as long as uncertainty persisted over when and whether Spain will request a bailout. Longer-term, concerns Spain would be unable to implement its budget plans and bring down its deficit could weigh on the single currency.

Some of those worries were reflected in higher Spanish bond yields and a drop in Spain’s benchmark IBEX stock index.

Nevertheless, the budget was well received and some said it was an attempt to pre-empt the conditions of a bailout. A bailout request by Spain is a precondition for the European Central Bank to start buying and lower borrowing costs.

Analysts and traders said this would lift the euro, but Spain has appeared reluctant to take that step.

The euro was marginally higher at $1.2920, well above Thursday’s two-week low of $1.2828. More gains could see it target last week’s peak of $1.31729 although offers from sovereign investors are cited above $1.2870, traders said.

“We do not see the euro moving much higher from here,” said Peter Kinsella, currency strategist at Commerzbank.

“Already Spanish yields have gone up and going into the weekend we expect some positions to be squared. The euro should be in a $1.2750-$1.3100 range in the next few weeks.”

The euro is up 2.1 percent on the quarter, thanks largely to expectations that Spain’s borrowing costs will be brought down when the ECB starts buying Spanish debt.

Trade on Friday was expected to be impacted by month-end rebalancing flows. Citi said they would be negative for the dollar, although Hans Redeker, head of Global FX strategy at Morgan Stanley, reckoned these flows were likely to be too minor to influence trade.

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Moody’s rating agency is due to review Spain’s sovereign rating by the end of this month and may downgrade it to junk status, while the Spanish government is also due to publish its full evaluation of the banking sector on Friday.

“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 in Tokyo.

On Thursday, ratings agency Egan-Jones cut Spain’s sovereign rating further into junk status, citing the country’s banks and struggling regional governments.

The Spanish budget 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 euro was up 0.1 percent at 100.27 yen, recovering from Thursday’s two-week low of 99.64.

The dollar was flat on the day at 77.60, recovering from a two-week low as Japanese repatriation flows before the end of financial half year on Sept. 30 waned.

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