A quiet holiday market in Europe and a slow start to trading in the U.S. provided ample opportunity for the euro to claw its way up slightly from the hole the currency fell into

yesterday. Still, the European single currency hit fresh six-month lows against the dollar before rebounding slightly to $0.8585 this morning, a bit above yesterday's close of $0.8563. The euro also crept back up against the yen, reaching 103.13 yen per euro, from 102.85 yen at last close.

Analysts are divided about the future direction of the euro, as some expect the currency to approach parity with the dollar by the end of the year, while others see that as a long shot, at best.

A series of weaker-than-expected economic data from the Europe sent the euro downward for two consecutive days. Germany, Europe's largest economy, was at the forefront of the disappointing data. Tuesday's

Ifo

business climate survey fell to the lowest level in two years. Yesterday's worse-than-expected German inflation data and lower-than-projected GDP growth figures for Germany and France exacerbated the situation.

"Over the longer term, the euro will have more downside risk than upside risk," said Alex Beuzelin, the senior market analyst at

Ruesch International

, a global market analysis firm.

In light of the recent economic weakness displayed throughout Europe, John McCarthy, a senior vice president at

ING Barings Capital Markets

, believes "the danger for the euro in the future is directly linked to the performance of the eurozone economy." Should the slowdown continue to worsen in Europe, both Beuzelin and McCarthy foresee a further decline in the euro, possibly down toward the record low near 82 cents, or "we may even get a test all the way down to 80 cents

per euro sometime," McCarthy said.

The sharp drop in the value of the euro was a bigger concern for Japan than for Europe, as the yen reached five-month highs against the euro and two-and-one-half month highs against the dollar. In Japan's current economic malaise, the government has been counting on a weak yen to aid the country toward recovery by way of strong exports. The unexpected strengthening of the yen as the euro fell provoked the top financial diplomat in Japan,

Haruhiko Kuroda

, to comment that should the "unnatural" currency movements continue, the Japanese government may intervene to weaken the yen.

The dollar traded recently for 120.15 yen per dollar, barely off its last close of 120.18 yen per dollar.

Other analysts believe the euro will rebound strongly by the end of the year. Steve Barrow, a currency strategist at

Bear Stearns

in London, expects euro-dollar parity by the start of the new year. John Mesrobian of

Constantinople Advisors

, a company that provides advice to investors on currencies, commodities and bonds, is more bullish, forecasting parity before November. Mesrobian added that the euro may shoot as high as $1.085 near year-end, and he has "even seen scenarios for $1.25

per euro."

A weak euro will increase inflationary pressures in Europe, the leading reason why the

European Central Bank

hasn't reduced interest rates more than 25 basis points this year. The

Federal Reserve in the U.S. has cut rates by 250 basis points since the start of 2001.

A sluggish single European currency could cause problems for American companies looking to rebound. As U.S. exports become more expensive, overseas sales can suffer. Also, the repatriation of funds from euros to dollars would lead to lower than expected revenue for companies counting on a stronger euro.

TheStreet.com

took a look at the

possible effects of a struggling Europe on a U.S. economic rebound.

A large part of Mesrobian's beliefs are based on his optimism that the ECB will intervene in the foreign exchange markets soon, catching dollar bulls off-guard and supporting the euro. Barrow is more concerned with the introduction of the actual euro hard currency into the markets in January 2002 and the positive effects that the conversion of black market funds to euros will have on its price.

"In relative terms, we're just correcting a very undervalued postion," said Barrow. The euro was first introduced at $1.17 at the start of 1999.

Lisa Finstrom, a currency strategist at

Salomon Smith Barney

, maintained that "the euro is still undervalued," but added that "currencies can stay under or overvalued for a long time." Economists at Salomon expect the euro to reach 95 cents in the longer term.

The global head of foreign exchange research at

ABN Amro

in London, Tony Norfield, is a more conservative, expecting the euro to trade for 87 cents by the end of the year, and "barely 90 cents by the end of next year. You would need a complete cataclysm to reach parity," he said.

But as for this morning, the markets remain subdued. The British pound weakened slightly this morning, pricing recently for $1.4134 from $1.4193 at yesterday's close. The Australian dollar strengthened against its U.S. counterpart, fetching $0.5179 recently, up from $0.5165 at last close. The U.S. dollar lost value to the Canadian currency, most recently going for C$1.5476, down from C$1.5508 at yesterday's close.