Enlarge imageBy Stephen Jewkes
MILAN (Reuters) - The euro is unlikely to topple the U.S. dollar as the world's leading currency but could well reach an equal footing, European Central Bank Governing Council member Ewald Nowotny said in a paper prepared for delivery.
Nowotny, who heads the Austrian central bank, said in 10 years time, there were likely to be several major currencies acting as a medium for trade and reserve assets, creating fresh challenges for policymakers in avoiding currency market swings. "Looking ten years into the future, it is highly improbable that the euro will eclipse the (U.S. dollar) as (the) world leading currency," the paper said.
Nowotny will present the paper, co-authored by Clemens Jobst, at a Johns Hopkins University event in Bolgna, Italy, on Thursday. It was posted on the university's Web site.
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Emerging market heavyweights such as China and Russia have called for debate about the dominant role of the U.S. dollar in trade and investment, suggesting the International Monetary Fund's Special Drawing Rights as an alternative.
Nowotny said he expected two or more large international currencies to emerge, requiring policymakers to more carefully coordinate their actions.
"On the international level, the coexistence of two or more large international currencies creates new challenges for policy coordination and the management of volatility between the main currencies areas," he said in the paper, which did not comment on the outlook for the economy or interest rates.
"The euro has the potential to provide a significant contribution to world financial stability. This opportunity has to be seized by European politics."
NOT RATES ALONE
Nowotny said coordination was also needed between central bank interest rates and regulation to avoid future financial imbalances.
The ECB has cut rates to a record low of 1.0 percent and is adding extra liquidity to markets, and Nowotny said monetary policy could clearly ease the process of resolving imbalances.
"When it comes to preventing the recurrence of similar imbalances in the future, however, the principal tool of monetary policy, the interest rate, is not the instrument of choice," he said.
"The principle objective of monetary policy is price stability and using the same policy tool to achieve other targets creates potential conflicts in the setting of the policy stance. To ensure stability of the financial system monetary policy has to be complemented by a better and more encompassing regulatory regime."
The ECB's interest rate cuts had been effective in also bringing down rates on new mortgages and corporate loans, "providing some needed stimulus to investment and consumption."
Nowotny said the 60 billion euro covered bond program had also had an impact, noting the number of new bonds coming onto the market and a reduction in spreads.
(Writing by Krista Hughes; Editing by Victoria Main)
