The recent strength in the European single currency has fueled concerns 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 the pound sterling.
However, industry participants are now fretting over whether too strong a currency could derail Europe's recovery by dampening export demand.
Markit's Purchasing Managers' Index (PMI) for the euro zone rose to a 10-month high of 48.6 in January, up from 47.2 in December, suggesting signs of a recovery. However, France's PMI slipped to a four-year low.
(Read More: Euro Zone Showing Signs of Recovery, Optimism Builds)
Currency analysts said the rally has further steam in it and could ramp up pressure on struggling euro zone nations including France, Spain, Italy and Greece.
Jesper Bargmann, head of G11 spot foreign exchange 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," he added.
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.