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.

Many experts say the dollar's strength reflects a currency war.

"Central bankers [outside the U.S.] struggling against weak growth and falling inflation have come up with a cunning plan: shift the problems onto someone else," writes Alen Mattich of The Wall Street Journal.

"Finding it hard to stimulate domestic demand through cheap credit in a world of rock bottom interest rates, the next best solution central bankers have settled on is to generate growth by boosting net exports. And the way to do that is to devalue their currencies."

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