W-Shaped Recovery Will Push Euro Lower. By Nicholas Hastings

Chances are the euro will continue its recent slide against the dollar.

For a brief moment this week, a strong ZEW survey from Germany lifted economic sentiment and helped the single currency to bounce a little.

However, the data are unlikely to shift market expectations for a W-shaped, rather than a V-shaped, recovery in the euro zone.

Nor, for that matter, will they strengthen the prospects for a global recovery.

As a result, risk appetite is likely to remain weak, ensuring that the euro remains under selling pressure against its U.S. counterpart.

Recent data do suggest that the euro zone economy is showing signs of emerging from a recession - in some instances even more rapidly than markets have been expecting.

But, in the case of the economic expectations index in the ZEW survey, which rose all the way to nearly a three-year high at 56.1 this month from 39.5 last month, this might well have more to do with recent gains in the stock market rather than a sustainable rise in confidence.

Higher stocks often translate into improved business confidence.

If anything, some analysts point to the continued low level of the current conditions index, the other main ZEW index, which is still way down at -77.2, only rising a little from -89.3.

This suggests that business confidence remains low for now despite the hopes for the future.

Coming after recent strong GDP and industrial production data for the region, the ZEW has certainly helped to lift euro zone recovery expectations.

However, these are unlikely to last very long unless other economic data, such as the more important German Ifo survey later this week, suggest that the upturn isn't just being driven by a rise in the inventory cycle.

In fact, some analysts fear that there is worse to come.

Carsten Brzeski, euro zone economist with ING Financial Markets in Brussels, warns that a deteriorating labor market remains an impediment to a real recovery.

He reckons that the rise in unemployment has so far been limited to short-term jobs. When the massive excess in capacity in manufacturing becomes apparent, then the economy will more likely slip back into a W-shaped mode as longer-term jobs start being axed.

Early Wednesday, another sharp drop in Chinese stock was undermining sentiment and once again reducing the attraction of high-yielders such as the single currency.

The Shanghai Composite Index was down 5% shortly before its close. The Nikkei in Japan lost 0.8% on the day.

By 0645 GMT, the euro had fallen to $1.4091 from $1.4135 late on Tuesday in New York, according to EBS.

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The euro was also down at Y132.97 from Y133.84 while the dollar slipped to Y94.29 from Y94.70.