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Cyprus Deal Pop Proves Short-Lived for Euro

Siegfried Layda | Photographer's Choice | Getty Images

The euro at first welcomed the Cyprus bailout deal, jumping close to half a percent against the U.S. dollar on Monday, but later plunged more than 1 percent as forex strategists shifted their gaze to the euro zone's darkening outlook.

The single currency climbed to $1.3047, rising from around $1.2975 before news that Cyprus has struck a $10 billion euro deal with its international lenders reached the market, but it later dropped to $1.2847, near four-month lows hit last week.

(Read More: Cyprus, European Union Reach Draft Bailout Deal)

The country's bank workers union is considering a strike over a range of issues including lost jobs and pensions on Tuesday when lenders are scheduled to re-open after a more than week-long closure, according to media reports.

The deal proposes a levy on deposits over 100,000 euros in the Popular Bank of Cyprus, known as Laiki, while exempting those under that amount in all banks. According to Sean Callow, senior currency strategist at Westpac Bank, there are still few uncertainties like at what rate deposits over 100,000 euros will be taxed, and how Russia will react to the new deal.

"We will be watching Russia's reaction—will they undertake action against those who signed up to the deal, in particular Germany?" he said.

Twenty percent of total deposits in Cypriot banks are held by Russians and many Russian businesses are registered in Cyprus.

(Read More: How Russia Could Take Revenge Over Cyprus Deal)

In addition, despite reaching an agreement, concerns over bankruptcy in the island nation remain. Ratings agency Moody's, for example, said the country is still at risk of default even if the current crisis is resolved, adding that the situation is still "credit negative" for all euro sovereign ratings, Reuters reported.

Outside of Cyprus, there are other risks that are clouding the outlook for the euro, Callow noted.

"The euro zone economy seems to be decelerating, and we have no resolution in the far larger market of Italy," he said, referring to the political stalemate in the country which emerged after elections last month which left no party with a majority in parliament.

Callow forecasts euro-dollar will fall to 1.27 over the next month—over 2.5 percent downside from levels earlier in the day.

The euro tumbled last week on worries over a possible collapse of the island nation's banking system, when the country's parliament rejected a proposal to tax bank deposits.