Euro falls as risk rally fades, Spain in focus

4:24pm EDT

By Gertrude Chavez-Dreyfuss

NEW YORK (Reuters) - The euro slid against the dollar late in the New York session on Tuesday, pressured by a late fall in stocks and commodities as investors grew cautious about developments in debt-plagued Spain.

Spain, in no rush to seek a bailout, prepared for a new round of austerity measures in the 2013 budget but was met Tuesday by protesters who clashed with police in the country's capital.

Spanish Prime Minister Mariano Rajoy has already passed spending cuts and tax hikes worth slightly more than 60 billion euros over the next two years, but half-year figures show the 2012 deficit target slipping from view as tax income forecasts will not be hit due to economic contraction.

"The Spanish budget data was pretty appalling," said Tommy Molloy, chief dealer at FX Solutions in Ridgewood, New Jersey. "Tax receipts were lower while spending was higher, which indicates that austerity is not something that's going to work in Spain."

He added that it's really just a matter of time before the Spanish government seeks a bailout even as the country's Andalusia region is already considering seeking a 4.9 billion-euro emergency credit line.

Equities and commodities as a result lost momentum, while the euro and commodity-linked currencies such as the Australian and Canadian dollars fell after trading higher for most of the New York session.

European Central Bank President Mario Draghi's vigorous defense of the bank's bond-buying plan to a skeptical German audience on Tuesday had earlier underpinned the euro.

But even then, most analysts were convinced that the euro's rally wouldn't last long.

The euro last traded down 0.2 percent at $1.2906 after dropping to $1.2885, its lowest since September 13. If the euro turns lower again it could target the 200-day moving average at $1.2827.

The euro hit a high of $1.2970, a key trendline resistance over the last two weeks. Molloy and TD Securities Greg Moore were both convinced that the euro zone common currency's recent rally is finished.

Some market participants have already taken to the sidelines ahead of the Jewish Yom Kippur holiday and most expect trading activity to be subdued on Wednesday.

The euro, however, will be put to the test next week amid a slew of significant events.

The ECB will hold its next policy meeting on October 4 and U.S. non-farm payrolls data, a key monthly market driver, is due on October 5.

This month the Federal Reserve announced a third round of bond buying, so-called quantitative easing. The Fed said it will continue buying bonds until it sees a marked labor improvement.

The euro should remain under pressure if Spain drags its feet over requesting an international bailout. This must happen in order for the ECB to begin buying its bonds and, until it does, analysts say the euro is likely to weaken.

Last week, the euro hit a 4-1/2-month peak of $1.3169 on optimism as a result of the ECB plan and after the Federal Reserve announced aggressive quantitative easing earlier this month to boost a sluggish U.S. economy.

GREECE STILL A CONCERN

Worries about the size of Greece's deficit also weighed on the euro, with German's Der Spiegel magazine reporting it could be 20 billion euros, nearly double previous estimates.

Spain, meanwhile, is expected to unveil new structural reforms and its draft budget plan for 2013 this week, with investors also awaiting results of stress tests on its banking sector. A Moody's credit rating review of Spain is also expected, and it could downgrade Spanish debt to junk status.

In the United States, economic data had initially buoyed the dollar against the yen. U.S. home prices continued to rise in July, the latest evidence that the recovery in the housing market is on track.

Moreover, U.S. consumers' mood improved this month, with confidence jumping to the highest in seven months as Americans were more optimistic about the job market and income prospects.

The dollar hit a one-month high of 79.22 yen on September 19 after the Bank of Japan announced further monetary easing. It was last little changed at 77.80 yen.

(posted by Cecilia Gallagher)