The recent strength in the European single currency has fueled concern of further pain for the struggling euro zone, prompting French President Francois Hollande to call for reforms to the international monetary system.
(Read More: France's Hollande Calls for Stable Euro Policy)
Since the European Central Bank (ECB) President Mario Draghi promised to do "whatever it takes" to save the euro in July last year, investor sentiment for the single currency has surged.
The euro closed roughly 2 percent higher at the end of 2012, and has been one of the strongest performing currencies this year. Year-to-date the euro has gained nearly 3 percent against the dollar, 12 percent against the yen, 3.3 percent against the Australian dollar and 6.8 percent against pound sterling.
However, industry participants are now fretting over whether too strong a currency could derail Europe's recovery by dampening export demand.
January's Markit's purchasing managers' index (PMI) rose to a 10-month high of 48.6 from 47.2 in December, demonstrating encouraging signs of a recovery in the euro zone, although France's PMI did slip to a four-year low.
(Read More: Euro Zone Showing Signs of Recovery, Optimism Builds)
According to currency analysts, the rally has further steam within it, threatening to ramp up pressure on the struggling euro zone nations, including France, Spain, Italy and Greece.
Jesper Bargmann, head of G11 spot forex for Asia Pacific, at RBS Global Banking and Markets, sees the euro rallying another 5-10 percent by the year-end.
"The fear has gone and has moved to caution. People are moving out of safe haven currencies and Asian yielding currencies and back into the euro," he said. "Nothing is needed to spur the euro on as this is a strong trend.
However, factors that could derail it include anything that hurts global risk appetite, such as the resurgence of trouble in the European peripherals for example."
Bargmann added that the recent strength of the euro is a real concern for European economies, especially as policymakers have limited power to control the single currency.
On Tuesday Hollande said the continued strength of the euro risks deepening the recession within the euro zone, which contracted 0.1 percent in the third quarter of 2012.
He called upon European policymakers to establish an exchange rate policy, to prevent the euro fluctuating along with the mood of the markets. His call was quickly rebuked by German officials, however, who have made their opposition to exchange rate intervention abundantly clear in recent years.
"There is talk of a global currency war but Europe cannot really participate because of the way decisions are made. The ECB is in the process of shrinking its balance sheet while Japan and the U.S. are expanding. This disparity in monetary policy is reflected in the current euro/yen trade," said Bargmann.
(Read More: Why Currency Wars Might be Coming)
However, Sean Callow, senior currency strategist at Sydney-based Westpac Bank, said the French President should be thankful that the currency has not rallied further. "The euro is not that strong. In my opinion Hollande is complaining too early," he said. "Speculators have only just turned slightly bullish on Europe in the past month or so and have been short the euro since August 2011. It could have been a much larger move," he said.
"If he (Hollande) wants a weaker currency, I suggest he creates another crisis or there needs to be an expulsion of a member of the euro zone," added Callow.
According to Callow, the euro will run to 1.38 against the dollar over the next month, before falling back to 1.29 by the end of the year. The basis for this correction will be more bad news coming out of Europe, combined with better news from the U.S.
(Read More: Euro Rises Across the Board on Positive Data)
"Our growth forecast is below consensus expectations. We see the euro zone contracting by 0.4 percent in 2013. We expect another round of Greek funding and the resurgence of Spain asking for another bail-out," he said.
The International Monetary Fund has forecast the 17-country bloc will contract by 0.2 percent in 2013. Meanwhile, ECB estimates a 0.3 percent decline in 2013 - a marked reduction from the bank's forecast three months ago that the euro bloc would grow 0.5 percent in 2013.
- By CNBC's Katie Holliday; Follow her on Twitter: @HollidayKatie
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