El-Erian Says USD Will be Higher on Rates But Wary of Accelaration

Global growth could be better than expected in 2017, though many uncertainties remain that could impact expansion, with the biggest of them being steep gains in the U.S. currency, Allianz’s Mohamed A. El-Erian said on Monday.

The outlook for the global economy in 2017 will be similar to that for 2016, but with an upside risk, with the world expanding below 3 percent and the U.S. economy outperforming that with a growth of 2.5-3 percent, El-Erian, chief economic adviser to Europe’s largest insurer, said at the Asian Financial Forum in Hong Kong.

The U.S. outperformance is expected to bolster the dollar, but the currency could be lifted even further as the U.S. Federal Reserve would raise interest rates at least three times under a baseline scenario for 2017, not two as the market is pricing now, he added.

“If the baseline materializes, we get at least three hikes. That attracts more capital,” El-Erian said. “That is the major risk for the baseline, that the dollar gets too strong, too quickly and what you get is the repeat of what we’ve seen in the past, which is a very strong dollar breaks something in the system.”

U.S. dollar gains could, in turn, increase the risk of default in emerging markets for businesses that have borrowed heavily in foreign currencies to benefit from record-low borrowing costs.

“Most emerging economies have been tempted at one time or another to borrow in dollars because the cost is perceived to be lower,” he said. “Sovereigns have learned the really hard way and have stopped doing this. Corporates have not.”

“The biggest risk right now of the dollar movement is on the mismatch of corporates. That’s where the breakage happens and then the question becomes – does the corporate problem become a sovereign problem?”


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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza