Worries about high debt levels in Spain hurt the euro on Thursday, driving it to a three-week low against the dollar and causing the Swiss National Bank to step in as the franc broke through a ceiling the Swiss central bank set against the common currency last year.

Spanish borrowing costs rose as investors, following a poor debt auction on Wednesday, became increasingly nervous about the country's ability to meet budget targets that could mark another escalation of the euro zone debt crisis.

A U.S. government report showing the number of Americans lining up for new jobless benefits fell to the lowest level in nearly four years last week only added to the dollar's allure against the euro.

The U.S. outlook was in sharp contrast with Europe and Britain where separate reports showing German industrial output fell more than expected in February and British factory output suffered its biggest monthly fall in almost a year.

Bad numbers out of Germany and the UK gives you a weaker euro, said Joseph Trevisani, chief market strategist at Worldwide Markets in Woodcliff Lake, New Jersey. It pushes the ECB to the necessity of supporting the economy again, which in this case means more access to cheap money.

Against the dollar, the euro was down 0.7 percent at $1.3052, having hit a three-week low of $1.3038. It also hit its lowest in four weeks against the yen at 106.86 yen before recovering slightly to trade at 107.23 yen, down 1 percent.

SNB BUYS

Broad euro selling saw the single currency dip below 1.20 Swiss francs for the first time since the SNB set that level as a cap for the Swiss currency in September 2011 in a bid to curb a sharp rise caused in part by investors fleeing the euro.

The euro hit a low of 1.1992 francs, according to Reuters data, before recovering, with traders saying the SNB was seen buying euros around 1.20. An SNB spokesman said the bank would do all it could to defend the cap.

It recovered to last trade at 1.2019 francs, down 0.1 percent. Traders said the SNB's determination may make investors wary of testing their resolve again, but renewed euro zone debt worries may mean the central bank will have to step in again.

Until now the market has been doing the SNB's work for it if there was any dip towards the 1.2000 level, buying any dip as they believed the downside to be limited because they assumed the SNB would aggressively defend it, said Richard Wiltshire, chief FX Broker at ETX Capital in London.

If this mood ceases to prevail then market forces may dictate they have to get involved again.

Earlier in the day, RBC Capital Markets said the Swiss National Bank had bought about 1 billion euros against the francs.

Given the SNB's reserves are 50 percent in euros, 25 percent in dollars, 9 percent in yen, 5 percent in sterling, 4 percent in the Canadian dollar and 4 percent in other currencies, the bank said half that 1 billion euros can stay in euros but the rest will have to be recycled into the other reserve currencies in the same proportions.

EURO WOES

The renewed rise in Spanish government bond yields followed Wednesday's poorly received debt auction, with traders worrying that the positive impact from the European Central Bank's two low-interest, three-year funding extravaganzas may be coming to a screeching halt.

If we continue to see Spanish yields pushing out, the euro should broadly come lower and I'm happy to stick with a short position for now, looking to take profit near $1.3000, said Jeremy Stretch, head of currency strategy at CIBC in London

There's a realization that structurally the periphery of Europe remains under extreme stress.

After holding interest rates at a record low of 1.0 percent on Wednesday, European Central Bank President Mario Draghi said downside risks to the economic outlook prevailed and dismissed talk of an exit strategy from accommodative policy measures.

Traders reported thin market conditions ahead of the Easter holidays and the U.S. non-farm payrolls report on Friday.

The U.S. economy is expected to have added 203,000 jobs last month, after February's non-farm payrolls rose 227,000.