(Reuters) - The euro steadied against the dollar on Friday, recovering some of the ground it lost the previous day as speculation grew that Spain may soon request aid.
Traders said reported selling by a U.S. investor kept the common currency below the key $1.30 level and off the four-and-a-half month peak of $1.31729 it reached early this week.
Traders said the euro will struggle to reach those levels unless Spain makes a decisive move towards seeking a bailout.
The euro was steady at $1.2963, off a low of $1.2919 reached on Thursday.
Sources told Reuters Spain is considering freezing pensions and speeding up a rise in the retirement aid as it attempts to meet conditions of an international aid package.
"It is just a matter of time before Spain applies for financing in the coming weeks and that will be euro positive. But we think that will be the last piece of euro-positive news," said Carl Hammer, chief currency strategist at SEB in Stockholm.
"We are coming to the point where most of the good news for the euro is discounted."
He expected the euro to rise, with a target of $1.31 or slightly higher in one month's time. He said it would peak at not more than $1.34-$1.35 and expected it to fall again following a knee-jerk rally after Spain applies for funding.
Spanish Prime Minister Mariano Rajoy has so far hesitated over seeking a bailout, creating uncertainty in financial markets. Weak euro zone business surveys on Thursday also stoked concerns about a deepening recession.
The euro was buoyed recently after the European Central Bank unveiled a plan to buy the bonds of indebted euro zone countries - but only once that country requests aid.
There are also uncertainties regarding Greece, with negotiators still short of a deal that would unlock the next instalment of the country's 31.5-billion-euro bailout package.
"Two key questions. When is Spain going to ask for help, and will Greece be given the time and the money to effectively disappear off the radar screens for another six months or so?" said Gareth Berry, G10 FX strategist for UBS in Singapore.
Immediate support for the euro is seen near $1.2905, the 23.6 percent retracement of its rally from a two-year low of $1.2042 hit in late July to a four-month high near $1.3173 hit on Monday.
"The euro should find some support around the $1.2755 level," said Roy Teo, senior FX strategist for ABN AMRO Bank in Singapore.
The dollar was steady against a basket of currencies, with the its index at 79.408, clear of a six-and-a-half month low of 78.601 reached following last week's aggressive monetary easing in the United States.
The dollar eased 0.1 percent to 78.15 yen, well below a one-month high of 79.23 yen hit on Wednesday after the Bank of Japan boosted its asset-buying programme to help fuel the country's economic recovery.
Helped by improved risk appetite and higher stock markets the high-yielding Australian dollar climbed 0.4 percent to $1.0470.
