* Greenback aided by talk Fed easing could be in small steps
* Yen capped by speculation BOJ could ease next week
* Limited financial half-year end flows in dollar/yen
* Euro dragged by Moody's downgrade of Anglo Irish Bank
By Hideyuki Sano
TOKYO, Sept 28 (Reuters) - The struggling dollar got a reprieve on Tuesday, helped by a report that the Federal Reserve was weighing a more open-ended, smaller-scale bond buying programme compared with 2009.
Soft U.S. stocks encouraged profit-taking in riskier currencies, while a report that the Bank of Japan will consider loosening policy also helped the dollar by hampering the yen.
Still, many traders think the greenback is in a downtrend given the speculation that any future QE by the U.S. Federal Reserve, even in a modest form, would probably still be more aggressive than other central banks.
"Currencies like the euro and the Australian dollar have rallied so much so far this month that their momentum is waning a little bit. But that's just a short-term thing," said a trader at a Japanese brokerage house.
The Wall Street Journal reported that the Fed would announce purchases of a much smaller amount of bonds for a brief period and leave open the question of whether it would do more, a decision that would turn on how the economy was doing.
The dollar index managed to keep some distance from a seven-month trough of 79.19 hit on Monday, standing at 79.40, flat on the day.
The dollar was hemmed in a tight range against the yen, drawing marginal support from the Nikkei business daily's report that the BOJ may further ease policy at its Oct 4-5 meeting if it judges growth to be under threat.
That weighed on the yen as it revived talk the central bank could undertake more quantitative easing next week by injecting longer-term funds into the money market, or opt for the more controversial move of buying more Japanese government bonds.
In the background was continued investor anxiety that Tokyo may intervene if the yen gets up towards 82 per dollar.
"If the BOJ eases its policy and simultaneously intervenes in the currency market, that could be quite effective (in pushing down the yen)," said a trader at a Japanese bank.
The dollar was little changed from its New York's close at 84.25 with support at 84.05, the 61.8 percent Fibonacci retracement of its rise in the hours before and after Tokyo's intervention on Sept. 15.
FINANCIAL HALF-YEAR
Some traders expect more selling in the greenback from Japanese exporters towards the end of Japanese financial half-year end on Sept. 30, though so far such seasonal flows have been limited.
There are said to be some stop-loss orders around 83.80 yen, though deep falls beyond that level are unlikely given concerns about Japanese intervention, traders said.
BOJ money market data added to the evidence that Japan did not intervene on Friday, when the dollar/yen briefly jumped more than one yen, highlighting how nervous traders are about intervention.
Still, all the talk of QE by the Fed, even if in modest form, points to overriding weakness in the U.S. dollar.
"Very few people forecast contraction in the U.S. economy in the near future but the Fed is ready to act. The Fed is clearly the most dovish among major central banks, while the Bank of Japan and the European Central Bank are more sceptical about the benefit of monetary easing," said a trader at a major Japanese bank.
The euro, while not beset by QE fears, was no less vulnerable to fiscal debt woes in Europe.
It was little changed at $1.3465, away from Monday's five-month peak of $1.3507, after Moody's downgrade of the lower-grade debt at Anglo Irish Bank led investors to sell into the common currency's recent gains.
The euro's retreat meant it had failed the first test of resistance at $1.3511, a 50 percent Fibonacci retracement of its fall from $1.5145 last November to its June low around $1.1876.
The Swiss franc, on the other hand, flew at 0.9842 per dollar, in sight of a 30-month peak of 0.9776 hit last week.
The Australian dollar, another clear winner, was strong at $0.9601. Many believed it could retest its record peak of $0.9851 in coming weeks before charging to parity.
"The tendency towards more QE will reinforce the rising trend in non-QE currencies," said Greg Gibbs, an analyst at RBS in Sydney.
"It will reinforce the rising trends in commodities, especially gold and food staples, and commodity, Scandinavian and Asian currencies, and any currency that has less need of quantitative easing, such as the Swiss franc." (Additional reporting by Koh Gui Qing and John Noonan at IFR in Sydney and Masayuki Kitano in Tokyo; Editing by Joseph Radford)