The euro fell to 15-month lows against the pound and 16-month lows against the dollar on Thursday and could fall further, analysts said, as investors' fears over the future of the single currency resurfaced after the festive break.
The euro fell against most major currencies on Thursday morning despite a relatively successful French bond auction. Investors demanded yields of 3.28% on the country's 10-year debt, despite continuing concerns that its top credit rating may be downgraded. France, like other eurozone countries, has struggled to balance driving economic growth with reducing its government deficit.
However, demand for the bonds was not overwhelming, with the bid-to-cover ratio, a measure of the number of investors looking to buy, versus the amount of securities on offer, falling to 1.643%, down from more than 3% at the previous auction.
After the French auction, the euro hit a 15-month low of 1.2832 against the dollar, and was down to 0.8267 against the pound. The main European stock indices were also down.
The single currency has been on a downward trend since the final weeks of 2011, despite remaining relatively strong against the dollar during the year.
"2011 was a strong year for the euro, the European Central Bank (ECB) hiked interest rates twice and Asian sovereigns invested heavily," Richard Driver, currency market analyst at Caxton FX said.
"The debt crisis and the lack of any clear direction in the eurozone is finally taking its toll on the single currency. The market wants a more central role for the ECB in addressing the crisis but Germany continues to resist. The region is heading into recession, bond yields remain elevated and the short-term threat of eurozone debt downgrades from Standard & Poor’s is keeping investors on edge."
Driver said that he expects the euro to fall to 1.25 against the pound in the first half of 2012, and 0.8 against the dollar.
"There are bound to be plenty more euro-sell offs this year," he said.
Neil Mellor, a currency strategist at BNY Mellon, wrote in a note to clients on Thursday morning that it is usually difficult to use the currency's movements early in the year to forecast its fortunes for the rest of it, as both 2011 and 2010 saw trends that were then reversed dramatically.
However, the next few months could see it continue to fall, as doubts over the future of the eurozone begin once again to fill investors' radar screens, Mellor said.
"Cold, hard reality was brought home by yesterday’s Bund auction, whose allocation was only just covered and which served to remind us that investors’ faith in the Euro-zone has been shaken to the core," he wrote.
The last time the euro was this low was early in 2011, Mellor noted, before the revelations that Greece would need a second bailout, before Italy and Spain had been dragged into the mire of the sovereign debt crisis and before the markets had lost faith in the firepower of European bailout mechanisms, such as the European Financial Stability Facility (EFSF), to create safety nets should the crisis worsen.
This suggests that the currency's floor could be a lot lower than it is now.