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After Cyprus, What's Next for the Euro

A sign hangs above a Bank of Cyprus Plc branch in Nicosia
Simon Dawson | Bloomberg | Getty Images
A sign hangs above a Bank of Cyprus Plc branch in Nicosia

Once again, the euro zone has avoided disaster at the eleventh hour, this time with a bailout package for tiny Cyprus. Banks there are scheduled to reopen later in the week, and the euro, which was battered Monday by official comments on the rescue, has calmed.

(View more: CNBC: Eurogroup Announces Cyprus Bailout)

But the euro zone is hardly out of the woods, strategists say. Certainly it's a positive development to have a plan for Cyprus, but the European economy remains weak, and the gap is widening between euro zone economic activity and that of the U.S.

The relative tranquility "could simply be the pause that refreshes," says Boris Schlossberg, a managing director at BK Asset Management. The euro zone economy is no more robust than it was before the Cyprus crisis erupted, he wrote in a note to clients. "Downside pressures on the EUR/USD remain and they have much more to do with the lackluster rate of economic activity in the region rather than the latest saga on the sovereign debt front."

In the latest sign of weakness in the euro zone, car sales, which have long been weak in the southern countries, are now declining in the north as well.

Schlossberg says weak economic demand is only increasing pressure on the European Central Bank to cut interest rates even further - which would likely weigh on the euro.

Jens Nordvig, global head of currency strategy at Nomura Securities, agrees. "The news from Cyprus this weekend was substantially better than the initial bailout news from last weekend," he says, and he is now less concerned about capital controls. "But these are tactical considerations."

Nordvig says the bigger issue is the euro zone economy, with the gap widening between euro zone and U.S. PMI data. Also, he told clients, "the negative feedback loop between weak growth and banking sector fragility remains in place," further impeding recovery. Nordvig expects the euro to reach 1.25 against the dollar by the summer.

Camilla Sutton, chief currency strategist at Scotiabank, also told clients the euro's Monday tumble may not be the last of the weakness. With the common currency hitting a four-month low against the dollar and two-month lows against the British pound, Canadian dollar, and Australian dollar, "EUR is weak on all measures, and outflows are likely to continue."

Still, while traders may be averse to euro weakness, it could help the ailing euro zone economy regain a little traction. Simon Grose-Hodge, head of investment advisory, Singapore at LGT Bank, told CNBC that "there are areas for which a weaker euro is very, very beneficial," particularly for global exporters like Daimler, Siemens and Sanofi. "The weaker euro is simply going to add to their profit margins."

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