The euro has now sunk to lows not even contemplated when it was set up only 17 months ago. Then the assumption was that the euro would be strong. It was even possible it would rival the mighty dollar.

All the talk was of a new reserve currency, a currency which central banks across the world would have to hold. A currency that would be the symbol of the new emergent Europe. Fund managers across the globe rushed to buy it and in the first few days it looked as if all the predictions would come true. The euro was worth almost $1.20 and more long-term holders bought it. All believed the hype. They believed that this was a currency which would hold its store of value and over the longer term could only appreciate, as few investors at that stage were over-burdened with the new currency.

But quickly that sentiment turned. The euro was rocked by one political event after another. There were questions about the credibility of various directors. The political infighting between the French and Germans did not help. Problems such as a large Italian budget deficit and prospects the German recovery may not materialise led many to sell. Soon the only way any trader made any money was through selling. Many assumed that parity, where the dollar and the euro were equivalent in value, would be as low as it could go. There was talk that the European Central Bank would have to intervene if the currency ever reached such levels. But of course it sank through parity, there was no intervention. There was talk of an official policy of benign neglect from the ECB.

The central bankers of course dismissed this. The euro will appreciate, they repeated over and over . . . It is undervalued and will recover, became their mantra. But, of course, so far that has not happened. And this week the unthinkable happened. The euro sank below 90 cents for the first time.

Just two weeks ago some analysts had insisted that the ECB could not see it go this low and it would have to intervene. Now such talk is about intervention when the euro hits 85 cents or, if you prefer, 80 cents. There is little talk of "if" the currency will reach that level, more of "when". This may mean it will never happen - as is often the case, if the market believes a currency is going in one direction it will go in precisely the opposite direction. But that may not happen yet.

There is probably little doubt the euro is undervalued. The fundamentals of the recovery in Europe do not point to a currency at these levels. So logically the sell-off has overshot. That is the logic the ECB is relying on. But things could be more complicated.

At the moment, capital flows are extremely negative for the euro and very positive for the dollar. This is a combination of negativity towards the euro area, bullishness about the US and corporate activity. As a result it could be reversed if the next big take-over goes Europe's way.

There is also the much-cited lack of confidence among investors about ECB president Mr Wim Duisenberg. Last week the markets heard a rumour that Mr Duisenberg was going to resign unless the currency rallied a little. His chosen successor, Frenchman Mr Jean Claude Trichet is under investigation for misleading investors during the Credit Lyonnais takeover. As Mr Jim Power, chief economist at Bank of Ireland, points out, that is hardly going to inspire confidence in anyone seeking to invest in euros.

The usual suspects such as structural reform, the favourite scapegoat of the central bankers, also have a place in the saga. There is little doubt that the French are far more social democratic-orientated than free market. But many in that country at least would not feel that a strong euro would be a price worth paying to get rid of cherished labour market practices and a high standard of living. Despite worries, the US story continues to be extremely positive. The US is still booming, inflation is still broadly under control. The balance of payments is under pressure, but the sell-off in the Nasdaq and other equity markets has calmed nerves. Many now believe that the market can maintain these levels and the situation is a lot more sustainable now than a month ago.

Even from a technical viewpoint, things are negative for the euro. There are no real charts that have any historic resonance. Traders use the deutschmark but that is a poor substitute and, importantly, they have all only ever made money by selling the currency. Buying it is for the purely speculative.

As a result, the currency is being sold and there is no apparent floor. According to Mr Power there is no reason it should not sink to 85 cents and then lower again if there is no intervention.

So why has there been no intervention? The most likely reason is that intervention generally persuades traders that there is serious money to be made. They force the currency down to new levels to take more money out of the central bank. In current circumstances the ECB is probably right, intervention would probably only lose the money and do little for the currency.

But if it continues to fall they will have little choice. There will come a point where dollar strength will seriously accentuate the massive trade imbalances between the US and Europe. There may also come a point where the weak euro will trigger a crisis in confidence about European assets generally. A large sell-off in European equity and bond markets could trigger a global crisis.

As a result it may be that the ECB, together with the Federal Reserve and the Bank of Japan, will have to negotiate some co-ordinated intervention. The markets would have to take that seriously. Taking on the three biggest central banks would not be easy. If the action was backed up by all officials giving the same line that the euro was undervalued, it could work.

Whether it comes to that, or whether some bad news from the US rescues the euro in the meantime, is anyone's guess. The ECB must be praying for some bad news from the US. The other outcome could look like a sell-out for a still very new organisation.

Jane Suiter is at jsuiter@irish-times.ie