* Dlr helped by talk Fed easing could be in small steps
* Yen capped by speculation BOJ could ease next week
* Euro hurt by speculation of Spain downgrade
(Releads, adds quotes, changes dateline prvs TOKYO)
By Anirban Nag
LONDON, Sept 28 (Reuters) - The struggling dollar earned a breather on Tuesday, helped by a report the U.S. Federal Reserve was weighing a smaller-scale, more open-ended bond buying programme compared to its previous large asset purchase scheme.
Soft U.S. and Asian stocks prompted profit-taking in riskier currencies, while a report the Bank of Japan will consider loosening policy also helped the dollar by knocking the yen.
Still, many traders expect the greenback's downtrend to stay intact, taking the view that any future quantitative easing (QE) by the Fed, even in a modest form, would probably still be more aggressive than moves by other central banks.
The Wall Street Journal reported the Fed was considering buying a much smaller amount of bonds for a brief period and decide whether to do more depending on how the economy fared.
"It has been quite a rapid move down for the dollar so investors are using this WSJ report to square up short positions," said Paul Mackel, director of currency strategy at HSBC. "The dollar's trend remains lower and investors will be looking to sell at better levels."
The dollar index kept some distance from a seven-month trough of 79.19 hit on Monday, standing at 79.78, up 0.5 percent on the day. It has lost 4 percent so far this month as investors stepped up sales in the greenback on the back of a disappointingly slow U.S. recovery.
The dollar was hemmed in a tight range against the yen, drawing marginal support from a Nikkei business daily 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 QE next week by injecting longer-term funds into the money market, or opt for the more controversial move of buying more Japanese government bonds.
CHANCE OF INTERVENTION HIGH
In the background was continued investor anxiety that Tokyo may intervene if the yen gets up towards 82 per dollar.
"There seems to be political pressure on the BOJ to ease policy further, but that is unlikely to alleviate much of the upward pressure that we are seeing on the yen from commercial flows," said Ian Stannard, senior currency strategist at BNP Paribas.
"So the downside risks for dollar/yen will remain and a further round of intervention will be required."
The dollar was marginally lower from its New York's close at 84.20 with support at 84.05, the 61.8 percent Fibonacci retracement of its rise in the hours before and after Tokyo's yen-selling intervention on Sept. 15.
Some traders expect more selling in the greenback from Japanese exporters before the end of Japan's fiscal first half on Sept. 30. 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.
The euro, while not beset by QE fears, was vulnerable to fiscal debt woes in Europe with fresh speculation that Spain may be downgraded by Moody's knocking the single currency below the $1.34 mark on Tuesday..
The euro fell 0.45 percent to $1.3393, moving away from Monday's five-month peak of $1.3507. 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.
"This sell-off in the euro could see it fall to as low as $1.32 before it bounces back," said BNP's Stannard.
The euro also lost ground on the crosses, especially against the Swiss franc, falling nearly 0.5 percent to 1.3196 francs. The franc was flat at 0.9852 per dollar and not far from a 30-month peak of 0.9776 hit last week.
(Additional reporting by Hideyuki Sano in Tokyo)