The start of the year has heralded a substantial shift in foreign exchange markets, with riskier currencies no longer trading as one. As a result, the euro is looking increasingly isolated.

The single currency has fallen to 16-month lows against the dollar and is lagging behind other currencies. Indeed, some analysts believe it is becoming an attractive alternative to the dollar as a funding currency, with investors borrowing euros to fund investment in higher-yielding assets in a so-called “carry trade”.

For much of last year, currency markets were in the grip of the so-called “risk-on, risk-off” trade. When investors were feeling confident and risk was “on”, they sold the dollar and bought virtually any other currency including the euro, the Australian dollar and the South African rand.