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Action in the Euro Could Dictate Wall Street Friday

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Traders will be watching the track of the euro Friday, as they decide how defensive they should be going into the weekend.

Thursday was a second day of "risk-off" selling, with stocks and commodities lower, and the euro headed toward the 1.31 level. The dollar index edged to its highest level since September. The Dow fell 46 points and finished at 13,880 but was well off its lows of the day. The S&P was off 9 at 1502, after falling to 1497, just above an area of support. The Nasdaq bore the brunt of the selling, falling 32 points or 1 percent to 3131.

(Read More: Fed talk on Slowing QE Hits Stocks)

"I think we needed a correction. I think the Fed minutes was as good an excuse as anything," said Steve Massocca of Wedbush Securities. "I think a lot of the selling that took place today came out of retail and individuals, where a lot of the buying had been recently."

Selling in stocks had accelerated Wednesday afternoon, after the minutes of the Fed's last meeting showed that many members of the Fed were expressing concern about the potential costs and risks from further quantitative easing. While analysts do not expect the Fed to end its asset purchases any time soon, the fact Fed officials discussed concerns about QE for a second month sent a shudder through markets.

The Nasdaq and Russell 2000, which had been hitting highs, were both down nearly two percent for the week as of Thursday afternoon. "This has been an unsettling event. I don't think it's going to be off to the races tomorrow," Massocca said. "I think it's going to take a little bit for people to rebuild confidence in the tape. I think it caught people by surprise because there wasn't any real news that led up to it."

Weak European PMI data followed by a surprising decline in the Philadelphia Fed index of minus 12.5 combined to rattle markets Thursday.

"There's negative Europe sentiment, but also the Philly Fed hurt the market," said Boris Schlossberg, managing director, foreign exchange strategy with BK Asset Management. "Bottom line is the whole assumption is global growth is going to pick up, and we're going to have this big recovery...There's more problems than solutions, and growth seems to be slowing rather than accelerating. That's the reason we're starting to see a little bit of a correction" across risk markets.

Schlossberg said he is watching German business sentiment data Friday. "We'll see how Europe trades…if we have more selling coming in then I think we'll start off the day negatively. We may see more liquidation into the weekend," he said, adding some investors may be nervous ahead of the Italian election this weekend. Schlossberg said if former Prime Minister Silvio Berlusconi looks set to win that will send "tremors" through the markets.

Oil tumbled 2.5 percent Thursday to its lowest level of the year as the dollar gained, and after weekly inventory data showed a greater-than-expected increase of 4.1 million barrels last week. Oil stockpiles are at the highest level since the Energy Department began collecting the data in 1982. West Texas Intermediate fell $2.38 to $92.84 a barrel.

(Read More: Fed Officials Divided on Future of QE)

John Kilduff of Again Capital said the $95 level is the place to watch for a move back in crude. "But if the dollar keeps rocking here, it's going to be putting downward pressure on dollar-based commodities," he said.

Bonds prices were higher Thursday on worries about the economy, and in reaction to the decline in stocks. The 10-year yield fell to 1.93 percent. "The market is rallying on the back of stocks, but we're actually seeing better selling," said Charlie Parkhurst, managing director in government bond trading at Barclays.

There is no data Friday, but there are a few earnings including Abercrombie and Fitch, Washington Post, Mohawk and Agrium.

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