Zeus had issues with overgrown teeth, and the first time I had the vet look at his teeth she told me they looked fine. He still wasn't acting normal so I took him back and turns out that he had a molar spur that the vet had missed the first time. It was a pretty small, but I guess big enough to bother him. So I don't want to make you worry more, but it is possable that there is something going on there that the vet missed last time.
When Zeus had teeth problems he had diffrent symptoms. He started drooling and he would pick up food but then drop it again, and he wasn't eating as much hay and salad.
I also had problems with allergies. When we first moved here Barnaby's eyes started watering and so did Ziggy's. It was a clear watery discharge. I took them both to the vet, thinking they where sick, but we eventually found out that they were both allergic to a cleaner I was using in their room. I stopped using it and they both went back to normal.
If he's still eating a normal amount I would start eliminating things from the area you keep him in to try to see if you can find what might be triggering allergies. Is there anything new you started using in your room or his cage? Even if you don't spray perfumes or anything, it could be something like a cleaner or detergent that you use in your room, or in his cage. Mabye something like a certain laundry detergent you use to clean his bedding or something you use to clean in general. If he doesn't inprove you can have the vet check his teeth again just to be sure. But it's a good sign that he's still eating and acting normal.
Also allergies and teeth arn't the only things that cause watery eyes. Infections, dry eyes, or eye trama can also cause it. Did your vet already rule those out?
Good luck! I hope you find out whats going on with Smudge soon!
Edit to add: I always read that rabbits don't get allergies to paper litters. However, Carefresh is a paper litter and Barnaby had problems with it. I'm not sure about the product you use, but when it breaks apart is it dusty or powdery at all? I would definatly try using a diffrent litter and see if that helps. Maybe the pine bothers him even though it's kiln dried. Did you just start using it?