Most currency strategists think the euro will reach or rise above the key $1.30 level at some stage this year as markets focus on deficit worries in the United States, according to a Reuters poll.
The dollar has come under intense downward pressure against the euro in recent weeks and yesterday it hit a low beyond $1.2810 amid worries about the US budget and current account deficits and the prospect of continuing low US interest rates.
Think-tanks and official sources say $1.30 could prove a decisive "pain barrier" for the euro region's industry by making their exports too expensive.
Although many analysts expect the single currency to hit $1.30 in the short term ahead of the Group of Seven meeting in February, the poll also shows many expect a more sustained rise above $1.30 during the course of the year.
Thirty seven out of 51 strategists in the survey, taken January 5 to 7, said the euro will reach or rise above $1.30 at some point in the next 12 months.
Mr
Adrian Hughes at HSBC in London said there may be some dollar retracement in the summer in the run-up to the November US presidential elections, but otherwise he doesn't see any changes from his central dollar bearish view.
"The market seems to be happy to sell the twin-deficits story and we think that's a huge problem and will take a long time to correct. So ultimately we see euro/dollar peaking at $1.35," he said.
Euro strength has been driven by a move away from the dollar rather than increasing optimism about the euro zone economy.
"The euro is rising because strong growth outperformance from the US is no longer enough to offset the low rate of return there and capital flows out of the EU to the US have dried up," said Mr Trevor Williams at Lloyds TSB Financial Markets in London.
Finance ministers from the G7 nations are expected to discuss the weakness of the dollar at their next meeting in Florida in February. A G7 source told Reuters that European nations in particular were becoming increasingly concerned about the sharp slide in the dollar.
A Reuters poll showed the strong euro will be a reason why the European Central Bank will wait until the second half of the year before raising interest rates from 2 per cent.
But an acceleration above the $1.30 level could prompt calls for euro zone policymakers to cut interest rates or intervene to slow the euro's rise.
Some analysts are predicting more rate cuts from the ECB.
"For the time being, I expect the dollar crash to continue, but ECB rate cuts and a dramatically improved price competitiveness of U.S. products will create a natural limit to how far the dollar can fall," said Dieter Wermuth at UFJ Bank in London, forecasting $1.40 in six and 12 months' time.