Global economies are moving at different speeds, creating a divergence in central bank policy that could cause trouble next year, says Mohamed El-Erian, chief economic adviser at Allianz.
The U.S. economy will strengthen, he writes on Project Syndicate. Chinese growth will stabilize at a level lower than recent averages, and Europe will struggle, El-Erian says.
"This multi-speed economic performance will contribute to multi-track central banking, as pressure for divergent monetary policies intensifies," he writes.
The Federal Reserve will probably start raising interest rates in the third quarter, while the European Central Bank conducts quantitative easing, and the Bank of Japan maintains its "pedal-to-the-metal monetary stimulus," El-Erian says.
The divergence means a stronger dollar, he writes.
"The problem is that exchange-rate shifts now represent the only mechanism for reconciliation, and the divide between certain market valuations and their fundamentals has become so large that prices are vulnerable to bouts of volatility."
The dollar already has hit a seven-year high against the yen and a two-year high against the euro this month.
"As it becomes increasingly difficult for currency markets to perform the role of orderly reconcilers, friction may arise among countries," El-Erian writes. "This could disturb the unusual calm that lately has been comforting equity markets."
Nouriel Roubini, an economist at New York University, says the BOJ's decision in October to expand its easing program could lead to another round of currency wars.
"Domestic demand is weak in advanced economies, and the only way to grow the economy is to weaken the currency to boost net exports," Roubini told Yahoo Finance.
Already the Bank of Japan's move has sparked reaction throughout Asia, including Korea, Malaysia, Thailand and China to avoid currency appreciation, he said. And Roubini believes currency devaluation will spread to Europe next.
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