New York: It has been a rough start to 2012 for the euro and it won't get any easier this week as the region grapples with a possible recession and two of its larger economies conduct a crucial test of investors' appetite for their debt.

In the first week of the year, the euro has lost 1.8 per cent and 1.6 per cent of its value versus the safe-haven US dollar and yen, respectively. The losses were largely driven by a growing contrast between the recovery in the world's largest economy and Europe, which is widely believed to be either in, or headed toward, a recession.

Data showing a healing US labour market helped send the euro to a near 16-month low against the dollar on Friday and more losses are likely if Eurozone sovereign debt and bank funding issues stay unresolved.

The market is seen staying on edge and the euro under pressure ahead of Italian and Spanish government bond sales this week, viewed as the year's first big fundraising tests for struggling Eurozone countries.

"The euro will likely continue to fall [this week]," said Charles St-Arnaud, forex strategist at Nomura Securities in New York.

Investors are particularly concerned about the borrowing costs of Italy, which must pay out €100 billion in bond coupons and redemptions in the first four months of 2012 alone.

Yields in Italy and Spain have continued to increase since the beginning of the year, with Italian 10-year yields back close to their end-November level, St-Arnaud said.

"Strong auctions could provide some support to the euro, but with the focus gradually turning to economic weakness and its impact on the fiscal situation, the support could be short-lived."

On track to $1.20

Nomura Securities said Friday's robust US nonfarm payrolls report added to a string of recent information that increased the firm's conviction that the euro is on track to reach the firm's $1.20 target in the first quarter.

As Europe's economy remains weak, the European Central Bank could decide to initiate measures to stimulate growth through asset purchases or another interest rate cut, or both.

Asset purchases would flood the market with euro supply and is therefore tantamount to printing money, which dilutes its value. Unfavourable interest rate differentials make higher-yielding currencies more attractive than the euro.

While strong economic data in the past buoyed risk appetite and benefited the euro, the divergence between the economies in the US and Europe has investors embracing the greenback.

"This implies that markets are beginning to price euro risk as euro-centric and no longer as a proxy for global market risk," said Camilla Sutton, chief currency strategist at Scotia Capital in Toronto.

This is an important development as it opens the door for other currencies, such as the Canadian dollar, to move more on fundamentals, she said.

"The euro is in the midst of taking another leg lower, a move that is coming as the market is forced to re-price euro-centric risks."