"If Greece is not going to adhere to the austerity measures put into place, there's going to be some serious discussions with regard to their staying in the EU," said Greg Michalowski, chief currency analyst at FXDD, an online foreign exchange trading firm based in New York. "It's getting increasingly closer to the idea that perhaps there will be an exit by Greece."
Debt-ridden Greece is set to hold a new election on June 17 after politicians failed to form a government on Tuesday.
Meanwhile, the U.K. is already drawing up contingency plans for the break-up of the euro zone, Bank of England governor Mervyn King said Wednesday.
"Contingency plans are being discussed and have been for some time," King told reporters following the publication of the bank's quarterly inflation report in London. "We are navigating through turbulent waters with the risk of a storm heading our way from the continent."
Economists and traders believe the euro will tumble based on the assumption of a limited form of a euro zone break-up, in which Greece departs by the end of this year, followed by one or two small peripheral economies next year, such as Portugal and Ireland.
"Our expectation is that the euro as a currency will fall quite sharply simply because of the short-term economic and financial damage that some sort of break-up is likely to cause," said Jonathan Loynes, chief European economist at London-based Capital Economics.
Loynes said a general aversion to the euro zone will prompt investors to pull money out of the euro zone as a whole, instead of just "moving it from the peripheries to the cores that they have done so far."
Instead, spooked investors will be flocking to safe-haven currencies.
The U.S. dollar's status as a safe-haven currency in risk aversion mode will once again gain momentum.
Loynes estimated that the euro will fall against the U.S. dollar, to $1.10 by the end of 2012, from its current level of $1.27.
Other non-European currencies, such as the U.K. pound, the Nordic currencies and the Swiss Franc will also be seen as safe havens from what's happening in the euro zone.
"Relative to the euro, they would be seen as safe havens, but they absolutely wouldn't be as safe as the dollar," Loynes said. "So they would be caught somewhere between the euro and the dollar."
Loynes is projecting that the sterling will rise to €1.35 ($1.72) by the end of 2012 and €1.40 by the end of 2013. Over the past few months, it has already gone up quite sharply from €1.15, to €1.25.
"The Norwegian krone per euro is currently at about 7.5 and we have the euro depreciating to 6.5 by the end of this year and stay there till 2013," Loynes added.
The euro will also depreciation against the Swiss franc assuming that the Swiss National Bank is unable to maintain the floor it set against the euro, which is 1.20 Swiss francs per euro. In that case, the Swiss franc could dip to 1.10 per euro by the end of this year, Loynes said.
Aimed to prevent a collapse of Switzerland's economy, the Swiss central bank's vows to defend the CHF1.20-per-euro floor have kept the Swiss currency -- seen as a shelter from the debt crisis in the euro region -- in a narrow range around CHF1.201 for the past month or so.
"The Swiss National Bank doesn't want its currency to get much stronger, so that's going to be a more difficult currency to have the flows roll into it," Michalowski said. "(The Japanese) central bank doesn't want the yen to get too strong either."
Therefore, Michalowski thinks money will first flow into the dollar, then into the pound, then the yen, followed by the Swiss franc.
If the ICE Dollar Index closes higher on Wednesday, this will be the 13th consecutive day it closed higher. "We haven't had 13 days in a row for quite some time," Michalowski said, referring to this longest consecutive run in 20 years.
"Across the board, we expect very significant falls in particularly emerging Asian currencies," said Mark Williams, chief Asia economist at London-based Capital Economics.
While Asia is quite well place to withstand the turmoil that will surround them if the euro zone breaks up, if the contagion spreads from Greece to other parts of Europe and results in a downturn in global trade, then parts of Asia will be hit pretty hard, Williams warned.
"The key issue is that Asian currencies are still driven, to a significant degree, by global risk appetite," Williams said. "So when investors get nervous, then Asian currencies tend to weaken."
Williams points to the Korean won as one of the currencies that will likely take a big fall, citing the fact that the won usually suffers during times of global risk aversion.
Is A Break-Up Priced In?
While Michalowski said it's very difficult to uncover whether a break-up in the euro area has already been priced in, he does think that there's "more room to the downside for the euro."
"The low for the euro versus the U.S. dollar was around $1.18 and that occurred near the first Greek bailout," Michalowski said. "Could the euro head down toward that level? I think it wouldn't be totally out of the question."
"The $1.26 - $1.25 level was the low for this year and clearly getting through the $1.26 - $1.25 is the first step," Michalowski added.
The euro/sterling currency pair has moved down quite sharply over the last year and has made new lows recently.
The pound is currently trading around the 79.97 pence per euro level and Michalowski expects a move towards the 77.20 - 77.80 level.
"It might take a little more time to get through there because we've had a pretty good run already, but I still think there's a little more room to the downside," Michalowski said.
"Honesty, it's that type of market where anything can happen."
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