Turmoil has abounded in financial markets recently, whether it's the plunge in oil prices to 5 ½-year lows or the announcement of the European Central Bank's 1.1 trillion euro quantitative easing package.
Mohamed El-Erian, chief economic adviser for Allianz, sees two risks to the global financial system. "One is you have companies that are unhedged" when it comes to currency moves, he tells
CNBC. The dollar has hit multi-year highs against several major currencies in recent weeks.
U.S. companies already are suffering hits to their earnings. "But that's nothing compared to emerging market corporations that are unhedged." El-Erian argues.
"The second issue is this notion of lower volatility, the ability of central banks to repress volatility. They're battling. Look at the Russian central bank today. Look at the Swiss central bank today."
Russia's central bank is toiling to buoy the ruble, which has dropped 47 percent in the past six months. And the Swiss Central Bank dropped its ceiling for the franc earlier this month.
"If we shake this low volatility paradigm, then we're undermining a main element of policy," El-Erian states.
As for stocks, "we're going to see a lot more volatility" he notes. "And the resilience of investors is going to be tested a lot more this year. This is not going to be the goldilocks like in the past. Where we end up is a geopolitical call as much as it is an economic and corporate call."
As for the foreign exchange market,
Financial Times editors reject the popular notion that the world is in the midst of a vicious currency war.
Indeed, they see the harm coming from adverse reaction to the supposed currency war, not the supposed war itself.
"The threat looms of international economic relations being poisoned for years by fresh denunciations of deliberate competitive devaluation," the editorial states.
"Any loosening of monetary policy relative to expectations is likely to weaken a currency. The question is whether the eurozone is seeking deliberately to do so as a main aim of its policy (probably not) and whether trading partners have the ability to respond appropriately (they do)."
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