Investors eye new lows as euro tumbles As the euro lurches downwards to its lowest levels in nearly two years, investors are asking how far it can fall. The single currency hit a 22-month low on Thursday, dropping to $1.2514 against the dollar amid mounting speculation in the markets that Greece could soon exit monetary union. The euro has lost 5 per cent this month, a substantial move for a currency. Yet the swings in recent days have caught out some currency traders. Before the Greek elections at the start of May, the euro had barely moved against the dollar for most of the year. That led hedge funds to ditch their currency bets while the lower volatility meant companies reduced their hedging. Now investors are returning to the scene. And, while there may be competitiveness gains for euro area exporters from a cheaper currency in the longer run, European importers have recently stepped up their hedging in an effort to protect themselves against further falls, according to Commerzbank. There are growing signs that "real money" investors are reducing their exposure to the euro, worried by bleak prognoses circulating in financial markets. Asset managers and pension funds are among those now shedding their euro-denominated assets, according to Citigroup. Rathbones says its private clients in London have been getting rid of euro-denominated debt in response to increasing concerns over the eurozone's stability. These moves have undoubtedly added to pressure on the euro. But the currency's fall needs to be put in perspective. Analysts are still forecasting the euro will be $1.28 against the dollar at the end of the year, according to the average of 58 predictions collated by Bloomberg. The single currency is 22 per cent below its all-time high of $1.6038 against the dollar in the summer of 2008. The most bearish forecast is for the euro to hit $1.15 this year - a level last seen in 2003, an 8 per cent drop from present levels. In part, that reflects a reluctance on behalf of the big banks to predict publicly that Greece will leave the euro. UBS, the bank with the lowest estimate, says its house view is still that Greece will stay in the single currency. Others are sticking their necks out. Citigroup's chief economist this week forecast that the chance of Greece leaving the eurozone is now as high as 75 per cent. Predictions for just how low the euro could fall depend on different scenarios for Greece. A central issue is whether Europe's politicians manage to contain market contagion if Greece does exit. François Hollande, France's new president, called this week for the European Central Bank to play a greater role in propping up sovereign debt markets. If policy makers succeeded in putting in place measures to stem any contagion, Citi believes the euro would fall to just $1.20. But a disorderly Greek exit, in which a firewall falls short of what is needed, could have far worse consequences. Citi estimates that this would lead the euro to drop close to parity with the dollar at $1.01. In the event of an election outcome in Greece next month that reaffirms the country's commitment to austerity measures and reduces the chance of an exit, Deutsche Bank believes the euro could rebound to $1.30. If Greece does leave the single currency, it predicts the euro will fall below the 2010 low of $1.18. Meanwhile, analysts at HSBC argue that the best scenario for the euro in the event of a Greek exit would be both that the contagion did not spread and that, counterintuitively, Greece's economy suffered as a result. A positive experience for Greece would lead other countries to consider exiting at times of stress, they argue, reducing further confidence in the single currency. Still, a large part of the reason the euro's fall has not been more dramatic is that there is nowhere else to go. The euro is the second most liquid currency in the world after the US dollar, accounting for nearly 40 per cent of all daily trades, according to the most recent figures from the Bank of International Settlements. After that, liquidity in alternative currencies drops sharply, with the yen present in 19 per cent of trades, sterling 13 per cent and the Australian dollar less than 8 per cent. Central banks looking to diversify their foreign currency holdings out of the dollar, who are among the biggest buyers of the euro, have few alternatives. Then there is the problem that speculators already have record short positions on the euro, according to the most recent data from the US Commodity Futures Trading Commission. That means that on days when the euro falls through key technical levels, speculators close their shorts and the currency bounces back up again. Some investors are sceptical of the bearish view on the euro. Harmonic Capital is among those hedge funds that have tired of trying to profit from shorting the euro when risk aversion rises. "The move lower in the euro may already have happened and even if it continues it is likely associated with the risk of sharp reversals," says Patrik Säfvenblad, investment partner at Harmonic. Instead, the hedge fund has been snapping up eastern European currencies following their recent rout against the single currency, in the belief that a return to calmer markets later will lead to a rise in their value.