A second injection of cheap funds from the European Central Bank may give the euro a temporary boost but is likely to trigger a longer-term decline in the common currency.
The ECB's first long-term refinancing operation in December helped stave off a credit crunch, cut borrowing costs for lower-rated euro zone countries and restore relative calm to financial markets as Greece wrangled over terms of its latest rescue deal.
It also sparked gains this year in the euro gain against the dollar and the yen.
But with nearly half trillion euros expected to be pumped into the system on February 29, some analysts said these measures to stabilize the euro zone could come at the expense of the euro itself, though that may ultimately be no bad thing.
This is quantitative easing by the back door, said Maurice Pomery, managing director at consultancy Strategic Alpha.
In the short term it's fairly bullish for the euro as banks have an opportunity to get hold of two or three years of funding requirements and rebalance their balance sheets. In the longer-term...this money is going to get itself into the system.
The risk is that banks become reliant on ECB cash as other sources of funding are prohibitively expensive, forcing the central bank to keep offering low-rate funds or outright quantitative easing.
QE is often considered negative for a currency as the central bank expands its balance sheets and floods the market with new money to stimulate growth. In the case of the euro, this would lead to even greater weakness than was seen in the dollar and sterling following QE in the United States and UK.
The Fed and BoE can stop monetary easing whenever they want but the ECB has to continue because banks in the periphery are effectively cut off from the European interbank market, said Ulrich Leuchtmann, head of currency research at Commerzbank, who warned of longer-term inflation risks as a result.
The ECB can only stabilize many of these banks and their economies by increasing money supply.
Commerzbank expects the euro to fall to $1.20 by the end of this year, a level last seen in mid-2010. U.S. investment bank Morgan Stanley is even more bearish - their strategists see the euro hitting a 7-1/2 year trough of $1.15 by end-2012.
Ultra-low interest rates in the United States and signs the Federal Reserve is ready to pump more money into the economy mean the euro's decline against the dollar is likely to be gradual.
Strategic Alpha's Pomery said the euro could rally after the next LTRO, testing $1.35, on optimism better-capitalized banks will be able to survive any fallout from Greece.
Market positioning data showed currency speculators had trimmed recent record bearish bets against the euro but were still hesitant to turn bullish.
Much depends on whether banks use the funds to buy euro zone assets, or assets outside the currency bloc. UBS, for example, saw a take-up of around 500 billion euros at the second tender and said anything more meant banks would be using the extra cash to fund carry trades, where investors use the euro to buy higher-yielding currencies.
Both the high-yielding Australian and New Zealand dollars hit record highs against the euro in February, gaining 3.6 and 6 percent respectively this year. Many market players expected them to push even further.
Hans Redeker, head of FX strategy at Morgan Stanley, said a new trend could develop where commodity currencies rally while the euro weakens as a result of excess liquidity.
The longer-term outlook for the single currency is bearish. Risk reversals, a measure of relative demand for options on a currency rising or falling, show a bias for a weaker euro..
Recent euro zone GDP data showed output contracted in the last quarter of 2011, fuelling speculation of a recession.
If countries are mired in recession there is no way out of debt troubles without monetary easing. Our view is there will be explicit QE, said Patrick Armstrong, manager of Armstrong Investment Management, who is adding long Mexican peso and Singapore dollar positions against the euro.
In fact, a weaker euro could help peripheral euro zone countries regain export competitiveness and start to rein in budget deficits.
Where does the euro need to decline to to keep the euro zone afloat? We say $1.20 or below. Pushing additional liquidity into the system with this long-term tender is a monetary policy instrument. By this the ECB creates conditions under which the euro zone can survive, Redeker said.
(Editing by Nigel Stephenson)