(Bloomberg) -- A growing economic gap between the US and Europe threatens to further weigh on the common currency and European debt, according to Mohamed El-Erian.
“If you look at the good, the bad and the ugly of the global economy, unfortunately Europe is the ugly,” El-Erian, the president of Queens’ College, Cambridge, told Bloomberg Television Thursday. “The market has understood that divergence is a major story going forward.”
Donald Trump’s victory in the US presidential election has strengthened the dollar while spurring a slide in the euro as markets bet on more gradual interest-rate cuts from the Federal Reserve. The common currency briefly fell below the $1.05 mark Thursday, touching its weakest level in more than a year.
“It wouldn’t surprise me to see the euro go weaker,” the Bloomberg Opinion columnist said.
Swaps traders have been ramping up bets that the European Central Bank will have to cut interest rates at a faster clip than the Fed in the months ahead. They’re currently pricing in nearly 100 basis points of monetary easing by the ECB through March, according to data compiled by Bloomberg. That compares to bets on some 40 basis points of easing from the Fed.
Trump’s win raises the possibility of higher tariffs and an inflationary expansion while a political crisis rocks Europe’s largest economy, Germany, leaving investors on both sides of the Atlantic at a crossroad.
In Germany Wednesday, a panel of advisers to Chancellor Olaf Scholz said that the economy will likely only grow by 0.4% in 2025. Bundesbank President Joachim Nagel, meanwhile, said that Trump’s threatened tariffs could derail Germany’s economic output.
The yield differential between 10-year Treasury debt and German bunds rose to some 209 basis points on Thursday, the largest since April. Spreads could go even wider, El-Erian warned.
A report on European competitiveness released by former European Central Bank President Mario Draghi earlier this year is a “roadmap,” El-Erian said, even as the economy continues to face secular and cyclical challenges.
--With assistance from Jonathan Ferro, Dani Burger and Annmarie Hordern.
(Adds details on ECB, Fed expectations.)
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