The euro fell sharply against the dollar after a report suggested that European Central Bank policy makers may start considering an interest rate cut if euro zone data do not show any signs of improvement in the economy.
This would mark a significant turn-around for the ECB, which only last week stressed it was not preparing the market for a rate cut, and has encouraged market talk of a move in the coming months, analysts said.
"It sounds like the ECB's whispering campaign for lower rates has just been turned up a few notches to a louder clamour," said David Brown at Bear Stearns.
An ECB source was cited by Reuters as saying that recent data have not suggested that the euro zone economy will pick up in the second half of the year as the ECB has been forecasting.
The ECB will soon be in a position to decide whether lower rates may be appropriate, the source was quoted as saying.
"Judging by the back door comments being made by euro zone monetary sources, the ECB seems to be softening up the market for rate cuts down the line," Bear Stearns' Brown said.
He added that an ECB rate cut could be on the cards as early as September.
This afternoon the euro was trading at 1.2139 against the dollar, down sharply from 1.2215 at midday.