A darkening eurozone economic outlook, a shrinking interest rate advantage and scepticism over European authorities' ability to resolve the sovereign debt crisis have raised the risk the euro will fall towards $1.30 before year-end.
The single currency has already broken below $1.40 - a level around which sovereign demand has been clustered - and plumbed a six-month low around $1.3790 on Friday after the European Central Bank on Thursday signalled a halt to its policy tightening.
A near 5 percent fall in the euro against the dollar in the 10 days reflects investor concern over the stability of fiscally weak eurozone countries, including Greece and Italy, which in turn has shaken confidence in the region's banking system.
Greg Anderson, an FX strategist at Citi in New York, saw more downside for the euro unless the global growth outlook improved and investors were persuaded Europe was making lasting progress towards resolving the sovereign debt crisis.
"As it stands right now the euro is falling for a reason and neither of those variables look good at the moment. Could we have a move below $1.30 (this year)? It's definitely possible."
Market participants said long-term investors have dumped the euro in the past month despite mounting speculation the United States will introduce more quantitative easing, which is often dollar negative. Data from UBS on its client flows shows asset managers were big sellers of the euro last week, while hedge funds also shed the single currency.
"Real money has been quite specific and it's all euro downside at this stage," said Geoffrey Yu, FX strategist at the Swiss bank, which sees the euro at $1.35 in three months.
Until this week's break, the euro had held in a $1.40-1.47 range for much of the year despite market disappointment over European officials' efforts to help fiscally weak eurozone countries. It is up nearly 4 percent on the year.
It made a strong push below $1.40 on Thursday after the European Central Bank tempered its stance on inflation risks, signalling a halt to its cycle of interest rate rises. That removed what little support the euro had enjoyed on the prospect of a widening rate advantage.
While the ECB said it would keep buying bonds to curb borrowing costs for peripheral debt countries, many believe sentiment towards the euro will sour as policymakers dither in implementing permanent measures to stop the debt contagion.
"The ECB did sound dovish, and opened the door for rate cuts and further provision of liquidity to banks," said Henrik Gullberg, FX strategist at Deutsche.
He said the euro could recover above $1.40 if the ECB continued to buy government bonds of fiscally weak countries to stabilise their debt markets and if the global economy improved through year-end. But he added, "If we see a sustained break of the $1.40-1.45 range, we could see the euro establish a $1.35-1.40 range.
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