The euro, which rode to record highs on a surge of foreign euro zone bond buying earlier this year, is looking increasingly vulnerable as once-lucrative defensive trades start to go under water.
The euro tumbled below $1.10 and 130 yen today to its lowest since April. It has now fallen eight per cent from record peaks against both currencies scaled in May.
The euro's sharp fall this week in the absence of any specific news event has raised suspicions that investors are accelerating the currency's sell-off by bailing out of unhedged euro zone government bond positions.
The rise in European stocks to their highest levels in almost a year and the fresh surge in European debt yields makes it difficult to argue that the underperformance of the European economy is the main culprit behind the euro losses this week. Something else must be at work.
One of the most popular trades at the start of the year, when the threat of stalling economies, falling prices and conflict in Iraq preyed on investors' minds, was to go long German Bunds and short Japan's Nikkei stock index.
This trade - the star performer of the first five months - has turned sour with benchmark Japanese stocks leaping nearly 30 per cent in the past three months and Bund prices falling almost a percentage point from record highs hit in mid-June.
"Japanese investors, eager to ride the euro's rally, were particularly big buyers of euro zone bonds earlier this year," said a strategist at a global macro hedge fund who asked not to be named.
Analysts say it is only natural that the euro - the biggest beneficiary of the three-year bond boom - should have most to lose when global recovery trades gather pace.
"The popular trade at the start of the year was to go long euro zone government debt unhedged," said Mr Steven Pearson, chief currency strategist at HBOS Treasury Services.
"In an environment of a global economic upswing this is the wrong trade to have and we are seeing an outflow of capital from euro zone bonds."
Mr Andre de Silva, deputy head of bond strategy at HSBC Securities in London, said capital flows could not be divorced from currency moves and the euro no longer looked like a one-way bet, as it had done earlier in the year.
Japanese investors were net sellers of foreign bonds to the tune of 521 billion yen in the week of August 11-15, according to official data released earlier today.
Analysts warned a break below the 200-day moving average at $1.0950 could trigger further selling from both momentum and real money funds.