El-Erian: ‘When You Have Very Sharp Moves in Currency, Something Breaks’
By Dan Weil
MoneyNews.com
Wednesday, 26 Nov 2014
The dollar’s upward surge may cause problems for stocks, says Mohamed El-Erian, chief economic adviser for Allianz.
The greenback hit a seven-year high against the yen and a two-year peak against the euro earlier this month.
Divergent central bank policies are fuelling the currency move. While the Federal Reserve has begun pulling back its stimulus, the Bank of Japan and European Central Bank are increasing theirs to boost their flagging economies.
“Historically, when you have very sharp moves in the currency [markets], something breaks,” El-Erian told Yahoo Finance.
Traditionally it was emerging markets that suffered, El-Erian said. But, “I don’t think that’s the risk today. My major fear is that volatility in currency markets slowly gets translated to equity markets. Why? Because most equity investors don’t hedge their currency risk.”
Stock market volatility, as measured by the CBOE Volatility Index (VIX), jumped to a two-year high in October before falling back. “If volatility comes back, it is going to question the ability of central banks to suppress it,” El-Erian said.
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