Is China the real reason for the euro’s strength?

The euro has continued to strengthen — after hitting a two-and-a-half-year high last Friday — with strategists debating whether the currency was being boosted by a step-up in China's move to diversify its foreign holdings.

The single currency traded at $1.392 on Friday afternoon, building on the $1.387 hit on March 6 — the highest since October 2011— after the European Central Bank (ECB) failed to take action to boost inflation or quell the currency's appreciation at its March policy meeting.

(Read more: EU stocks could top highs, despite week's decline)

The euro's gain against the has been still more dramatic — posing a particular problem for Germany, whose high value-added goods compete directly with Japan's in the global export market. The euro traded at a near-six-year high of 101.46 yen on Friday.

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The ECB flagged concerns about the impact of the strong currency on the euro zone's worrying low inflation rates on Thursday. In February, inflation for region came in at 0.8 percent — significantly lower than the ECB's "below, but close to, 2 percent" target.

And some economists have said the euro's ongoing strength could hamper the scope for exports to stimulate the euro zone's economic recovery.

(Read more: ECB ready to fight deflation, keeps eye on euro: Draghi)

While capital inflows and the contraction of the ECB's balance sheet provide some explanation as to the euro's rise, some analysts also linked it to ongoing speculation that China is diversifying its foreign holdings away from the U.S. dollar.

"While the technical outlook and European domestic fundamentals look quite shaky for the single currency right now, there could be one external factor that may help to prop up the single currency in the face of these challenges: China," said Kathleen Brooks, research director at

Chinese authorities hold around $3.8 trillion of reserves, the majority of which are denominated in U.S. dollars. However, they have expressed a desire to diversify away from the greenback, and have already pared back their U.S. Treasury holdings — official data showed China sold almost $48 billion worth of Treasurys in December 2013, the most in two years.

(Read more: Is China's love for Treasurys waning?)

"(Chinese) foreign exchange reserves have to go somewhere, and if it is not into U.S.-denominated debt, the next most liquid market the Chinese may look at is Europe," Brooks told CNBC.

Germany vulnerable to high euro?

At first glance, Germany might appear particularly vulnerable to the strong euro, given that it is the biggest exporter in the single currency zone. However, economists noted that its high-value niche exports were less price-sensitive than those from the likes of Italy or France.

"Italy and France produce a lot of manufacturing and transport exports, which are not necessarily as focused and niche as those from Germany. They also produce agriculture stuff and lower value-added stuff like clothing, where price competition can be a bit more intensive," said James Howat, a European economist at Capital Economics.

Only 'real policy move' will push euro lower: Pro

Howat added that "anecdotally" he had heard European exporters complaining about the strength of the euro. However, exports rose by 1.2 percent in the euro zone in the last three months of 2013, topping the region's gross domestic product (GDP) growth of 0.3 percent.

Ken Wattret, co-head of European economics at BNP Paribas, concurred that the euro's strength was more problematic for the likes of France or Italy - or even Spain and Ireland, where the governments have taken more aggressive steps to increase competitiveness.

However, he warned that the appreciation of the euro against the yen in particular could prove problematic for Germany.

"If the euro moves against yen, it does matter for Germany as it is a competitor with Japan," Wattret told CNBC. "However, other countries are much more reliant on exports to stimulate growth… that's why you don't hear Bundesbank expressing concern about the strength of the euro."

—By CNBC's Katy Barnato. Follow her on Twitter: @KatyBarnato