The euro weakened against the US dollar and the yen after European Central Bank President Mario Draghi said the euro-zone was expected to stay in recession next year, reversing an earlier forecast for a recovery in economic growth.
The downgrade to the outlook for gross domestic product came as the ECB left its benchmark interest rate at a record low 0.75 per cent. Draghi said that there had been wide discussion on interest rates within the ECB, which taken together with the weaker growth track has stoked speculation the central bank may cut rates next year.
The euro fell 0.9 per cent to $1.2954 and dropped 1 per cent to 106.64 yen after the statement.
"By the second part of the next year, we should see the beginning of a recovery" in Europe, as the global economy picks up pace, Draghi said.
The ECB forecasts the region's economy will shrink 0.5 per cent this year, worse that the 0.4 per cent contraction it forecast three months ago. The economy would shrink 0.3 per cent in 2013, compared to an earlier forecast of 0.5 per cent growth.
The ECB lowered its forecast for inflation in 2013 to 1.6 per cent from 1.9 per cent and said inflation would be even weaker in 2014 at 1.4 per cent. Separately, the Bank of England kept its key interest rate at a record low 0.5 per cent while maintaining its quantitative easing programme.
Euro-zone GDP shrank 0.1 per cent in the third quarter, the European Union confirmed, following a 0.2 per cent contraction in the second quarter.
"The underlying reason for euro weakness is still there, and the ECB's warnings of continued weakness over the next year could be the catalyst for a continued euro drop," Neal Gilbert, market strategist at GFT, told Reuters. The ECB's first monetary policy decision in 2013 "could include another cut in interest rates."
Equity markets were broadly stronger across Europe, though sentiment was driven by optimism the US Congress will find a way to avert the fiscal cliff which could plunge the US economy back into recession next year.
Germany's DAX 30 rallied 1.1 per cent to 7,534.54, the highest since January 2008, as figures showed factory orders in Europe's biggest economy jumped 3.9 per cent, seasonally adjusted, in October. The Economy Ministry revised the previous month's decline to 2.4 per cent from 3.3 per cent.
France's CAC 40 rose 0.3 per cent. The Stoxx Europe 600 Index rose 0.7 per cent to its highest close since May last year.
Cracks are showing within Republican ranks over hiking taxes for the wealthiest Americans, a move that House Speaker and senior Republican John Boehner has refused to budge on in negotiations with President Barack Obama.
Some 80 members of the US Congress, including Republicans and Democrats, have signed a letter calling for an exploration of "all options" in to end a deadlock between Obama and Boehner, Bloomberg reported, citing a spokeswoman for Representative Mike Simpson of Idaho, a republican who has signed the letter.
US stocks were little changed. The Dow Jones Industrial Average fell 0.1 per cent and the Standard & Poor's 500 Index was up 0.02 per cent. The Nasdaq Composite rose 0.3 per cent.