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NEW YORK (Reuters) - The euro slumped broadly on Friday, setting a two-year low against the dollar after Spain's Valencia region said it would seek central government help to repay its debts, raising concerns the euro zone's fourth-largest economy may be forced to seek a full-scale international bailout.
A cut by the Spanish government of its economic growth forecasts for 2012 and 2013 also pressured the euro. Spain's revised estimates indicated that the country would be mired in recession well into next year.
As a result, the euro zone common currency plunged to record lows against the Australian, Canadian, and New Zealand dollar. It also hit a more than 11-year low against the yen, a three-and-a-half-month low against sterling and multi-month troughs versus the Norwegian and Swedish crowns.
Spanish 5- and 10-year debt yields surged to euro-era highs as Valencia, Spain's most indebted region alongside Catalonia, sought help under an 18-billion-euro program passed on Thursday aimed at helping regional finances.
"It's all about Spanish bond yields today, and the euro as a result is under pressure," said Martin Briggs, risk advisory consultant for global payments company AFEX Markets Plc in London.
"We have been telling our clients that this euro is a slow-motion train crash that's happening in front of our eyes. No-one seems to have the will or the ability to make the tough decisions that need to take place."
A statement saying euro zone finance ministers formally approved Spain's bank bailout failed to offset the gloom.
The euro fell as low as $1.2143 against the U.S. dollar, its weakest level since mid-June 2010, as traders took out an options barrier at $1.2150. It was last at $1.2159, down nearly 1.0 percent on the day, declining for a third straight session and posting losses of about 0.7 percent this week.
It was the third week of declines for the single currency against the dollar.
The single currency hit record lows against the higher-yielding Australian dollar, the Canadian dollar and New Zealand dollar.
The euro hit a more than 11-year low against the Japanese yen of 95.34 yen, a three-and-a-half-year low against the British pound, a four-month trough against the Norwegian crown and an 11-1/2-year low against the Swedish currency.
In data collated to July 17, speculators had increased bets against the euro. Changes in speculative positions after the Valencia news will only appear in data collated through July 24.
A statement by the ECB saying Greek government bonds are not eligible as collateral did not help the euro, with the currency declining further against the dollar on the news.
Earlier in the session the euro dipped on a German newspaper report that quoted a member of a party in the coalition government as saying euro zone countries should comply with agreed reforms or leave the bloc, traders said.
The comments repeated the position taken earlier this year by the same lawmaker, Gerda Hasselfeldt, of the Bavarian Christian Social Union.
The euro has also taken a hit since the European Central Bank lowered its deposit rate, which acts as the floor for euro zone money market rates, to zero earlier this month.
Two-year bond yields have dipped into negative territory in core triple-A rated Germany and the Netherlands. The negative interest rates could prompt investors who are bearish on the euro's outlook to shift money elsewhere to secure some return on capital, market players said.
Many analysts said the fact commodity currencies were rallying against the euro despite concerns about Chinese growth slowing was a sign that weakness in the single currency could continue.
The potential for another round of asset buying from the Federal Reserve may help support commodities and the Australian dollar, analysts said.
Speculation the Fed may opt for another round of monetary easing to boost growth, which would increase the supply of dollars in the system, slowed the euro's decline against the U.S. currency.
The cut in the ECB deposit rate to zero and the subsequent drop in money-market rates has also stirred talk of euro-funded carry trades, in which investors effectively borrow low-yielding currencies to invest in higher-yielding currencies and assets.
JPMorgan on Friday put out a note to clients saying it expects the ECB to cut the deposit facility rate to below zero. The U.S. investment bank expects both the refinancing and deposit rates to be cut in October, allowing the ECB a bit more time to assess any negative effects of the zero deposit rate before taking it negative.
Traders said the JPMorgan note helped fuel a euro sell-off as well.
Reporting by Nick Olivari and Gertrude Chavez-Dreyfuss; Editing by James Dalgleish