Ring of Kerry

The euro may slide to $1.12 against the dollar according to a new report from Ireland's Ulster Bank.

Chief economist Simon Barry says there is a real fear that a vicious circle or "negative feedback loop" will appear between the financial system and the real economy of the euro zone.

Barry warns that the euro could go even lower and make parity with the dollar.

"Market concerns about unsustainable public finance trends have forced euro-area governments to announce additional fiscal correction measures. While absolutely necessary, such action does constitute a further headwind to recovery," he says.

The current exchange rate is about $1.22, down from $1.45 just six months ago.

"In the current environment and we expect further declines by year-end to $1.12 and 78p. There is a risk of an undershoot, in the event of another major shock to the eurozone, which could see a return to parity or lower against the dollar," he says.

Barry blames the economic crisis in Greece for the new threat to the euro.

"It also gave investors plenty of time to consider the extent of vulnerabilities in other member states, which has given rise to heightened concern about the ability of countries across the eurozone, and beyond, to manage very large budget deficit and debt positions.

"The fragile state of the debt markets means that decisive action is required immediately to demonstrate commitment to such a course of action," he says.