Thu Sep 27, 2012 4:27pm EDT
* Spain releases budget for 2013, viewed as euro-positive * Euro support seen at 200-day moving average near $1.2826 * Focus on Spanish bank stress test on Friday * Egan-Jones downgrades Spanish rating By Gertrude Chavez-Dreyfuss NEW YORK, Sept 27 (Reuters) - The euro rallied from two-week lows against the dollar and yen on Thursday after Spain unveiled a 2013 budget viewed as a step in the right direction, easing worries the region's debt crisis was worsening. Spain, the euro zone's fourth largest economy, announced on Thursday a detailed timetable for economic reforms and a tough 2013 budget that focused primarily on spending cuts instead of tax increases. Analysts said Spain's move away from tax increases should temporarily help quell street protests in the nation's capital. "Overall, Spain's 2013 budget appeared to come across as fairly balanced,' said Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington. "By focusing on spending cuts rather than on tax increases, it didn't appear overly austere." In late afternoon trading, the euro rose 0.3 percent to $1.2915, sharply above a trough of $1.2827 hit earlier in the session, which was its lowest since Sept. 12. The euro has support at the 200-day moving average near $1.2826 and around $1.2740, the 38.2 percent retracement of the July to September rally. Against the yen, the euro also edged higher, rising 0.1 percent to 100.19 yen, after hitting 99.62 yen earlier in the day, its lowest since Sept. 13. Still, some market participants remained skeptical about Spain's budget despite the positive market reaction. David Schnautz, rate strategist at Commerzbank in New York thinks Spain's budget was not a "breakthrough announcement", while GFT currency strategist Neal Gilbert believes the country's strategy of keeping the masses happy by not raising taxes won't work in the long term. "(Spain's budget) will probably eventually lead to them needing a bailout," said Gilbert in New Jersey. "In fact, the current situation in Spain is very similar to another highly scrutinized budget plan a few years ago in Greece, and we all know how that turned out." Investors also are anticipating on Friday the release of a stress test of Spain's banking sector, which according to Reuters, is likely to reveal capital needs of about 50-60 billion euros ($77.5 billion). The latest figure, will be used to determine how much of the 100 billion-euro credit line available to Spain is needed to recapitalze the country's banks. BAILOUT DILEMMA Uncertainty over the timing of an aid request from Spain and divisions within the European Union over a plan to create a banking union sent the yield on Spain's 10-year bond on Thursday to its highest since the ECB announced its bond-buying plan on Sept. 6. Adding to concerns over Spain, the indebted Castilla La Mancha region may seek 800 million euros ($1 billion) in emergency funding from the central government, regional and party sources said on Thursday. Most strategists said the euro was likely to appreciate if and when Spain requests a bailout to trigger ECB bond-buying, although gains would be curbed by renewed concerns about Greece. Demonstrators clashed with police in Athens and Madrid this week in protest over new austerity measures. Greece's international lenders are at loggerheads over how to respond to its debt crisis, threatening more trouble for the euro in the coming weeks. A Moody's review of Spain's ratings is also expected this week. A cut could take the country below investment grade and put further pressure on policymakers. Late on Thursday, ratings agency Egan-Jones downgraded Spain's sovereign rating further into junk status, to a double C from double C plus, citing the country's weak banking sector and struggling regional governments. MYRIAD OF MIXED U.S. DATA An array of U.S. data, meanwhile, painted a mixed economic picture. Orders for long-lasting U.S. manufactured goods dropped sharply in August suggesting the main engine of economic growth was stalling, offsetting hopeful signs of an improvement in the labor market. A separate report showed the number of Americans filing new claims for jobless benefits fell 26,000 last week to a two-month low. U.S. economic growth, on the other hand, was much weaker than previously estimated in the second quarter as a drought cut into inventories. The dollar last traded down 0.2 percent against the yen at 77.60 yen and remains within sight of a seven-month low of 77.13 hit on Sept. 13, the day the Federal Reserve announced a new round of monetary stimulus.