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Euro Gets Trashed

Mike Kemp | Getty Images

The bad news just keeps coming for the euro, and it's taken a tumble in the last week. Here's how to trade it now.

Let's see: Upheaval at the IMF, negative comments from European Central Bank officials on peripheral debt, worrisome elections in Spain, Standard & Poor's going negative on Italy, Greeks rejecting an austerity plan - quite a bunch of bearish news for one little currency.

Sure enough, since May 2, the euro has fallen from $1.4821 to as low as $1.3977, and plenty of people hoping to catch the downdraft missed that train.

Today, the euro is off its recent lows, but it's wobbly. So is there more weakness to come?

Probably not much, says Jens Nordvig, head of G10 foreign exchange strategy at Nomura Securities. "In the very near time, we can trade lower, but I think it will get sticky around $1.39. Hence I would not run shorts longer than to there," he told me. At current levels, that doesn't give you tons of room on the downside.

Here's why: it's important to distinguish between negative euro sentiment and general aversion to riskier currencies, including the euro. In the past week, many relatively risky currencies have been in the doghouse while safe havens like the dollar, the Swiss franc, and the yen have strengthened. In that sense, the euro is just part of a trend, not a uniquely troubled currency. And by the same token, if investor confidence picks up again, that could theoretically lift the euro along with other, more up-and-down currencies.

Then again, the situation in Greece is seeming ever more precarious, and warnings about the impact of a default - or re-profiling, as some like to call it - are proliferating. So regardless of overall risk sentiment, an actual default would almost certainly have a dramatically negative effect on the euro.

The bottom line: be careful out there.

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