The euro fell below $1.29 for the first time in 15 months on Thursday as fear that Europe's debt crisis could worsen next year left traders scrambling to sell the currency before the calendar turns.
The latest cause of concern was Italy, which had to pay nearly 7 percent to borrow at a 10-year bond auction. That was below the euro-era record seen at previous sales but, traders said, still uncomfortably high for a country with such a high debt burden and facing slow growth.
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"There's a real worry now that the first quarter could be crunch time in the euro crisis just because of the sheer volume of debt that needs to be rolled over by euro zone countries," said Standard Chartered strategist David Mann.
The euro fell as low as $1.2856, according to Reuters data, its worst showing since September 2010, before rebounding to $1.2890. It also hit a 10-year low against the yen for a second straight day and last changed hands at 100.26 yen , down 0.5 percent.
The dollar was down 0.3 percent at 77.70 yen while sterling fell 0.2 percent to $1.5412.
While holiday-thinned trade kept volume light, Mann said traders who were active were looking to cut exposure to the euro now before the masses rush to do it in early January.
Analysts said the euro's decisive break below $1.30 meant this level would now act as technical resistance, with many traders expecting a move to $1.25 in the coming months.
Carl Hammer, currency strategist at SEB in Stockholm, said he expects the euro to drop to $1.25 by the end of March, adding "Italy have a massive refinancing need early next year and markets are a bit worried about it."
"The euro remains biased towards the downside, not just from a debt crisis perspective, but also from a fundamental perspective, with the European Central Bank expected to move toward more aggressive quantitative easing," said Audrey Childe-Freeman, head of currency strategy for Europe, Africa and the Middle East at JP Morgan Private Bank.
The euro began its sharp decline a day ago after ECB data showed euro zone banks deposited a record 452 billion euros ($585.18 billion)in low-interest central bank deposit accounts.
That came just days after the ECB provided banks almost half a trillion euros worth of three-year loans at cut-rate prices to encourage lending. The new data suggested banks were still wary of lending to each other.
Mann said he expects the euro to continue drifting lower in the first three months of 2012. But with the market so heavily tilted against it, he said chances of a brief rally on good news in the weeks to come could provide some pain for euro shorts and opportunities for nimble traders.
"We are bearish the euro and see $1.20 by the end of March, but I'd be cautious in the coming weeks," he said, adding the currency's slide would not be a one-way move.
The euro's decline helped push the dollar to its highest level in nearly a year against a basket of six major currencies .
Analysts said dollar gains should continue early next year, though some warned that could change with any sign the Federal Reserve is considering a third dose of quantitative easing.
U.S. economic data has painted a somewhat brigher picture of the U.S. economy in the fourth quarter so far. On Thursday, a report showed first-time claims for U.S. unemployment benefits rose in the latest week , though the four-week moving average, a better measure of trends, fell. (Additional reporting by Jessica Mortimer in London)