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By Lucia Mutikani
WASHINGTON, June 15 (Reuters) - The U.S. dollar will remain the main global reserve currency "for as far as we can see" and the recent spike in longer-dated U.S. government bond yields is not a sign of inappropriate monetary policy, a top IMF official said on Monday.
The U.S. dollar and Treasury debt securities have come under pressure as worries have grown that the government's massive efforts to rescue the economy from the longest recession since the Great Depression would undermine the appeal of U.S. assets to foreign investors.
The government's interventions are expected to push the nation's budget deficit to about $1.8 trillion this fiscal year. The White House projects a budget gap equal to about 13 percent of gross domestic product, which would be the highest since 1945.
"The dollar is the principal reserve currency in the global economy and will remain so for as far as we can see," John Lipsky, the No. 2 official at the International Monetary Fund, said in response to a question during a news conference on the IMF's annual review of the U.S. economy.
Countries such as China and Russia have questioned the sustainability of the U.S. dollar's dominance. Russia's central bank last week said it would cut the share of U.S. Treasuries in its $400 billion reserves.
But at the Group of Eight finance ministers meeting in Italy on Saturday, Russian Finance Minister Alexei Kudrin said the U.S. dollar's role as the world's main reserve currency was unlikely to change in the near future.
The IMF said the dollar, which has been hit by the re-emergence of risk appetite amid signs the economic slump is losing momentum, is "only modestly above the level implied by medium-term fundamentals."
However, the Fund cautioned that much would depend on the evolution of foreign demand for U.S. assets.
Worries over the ballooning budget deficit have also weighed heavily on U.S. government bonds, sending benchmark yields to eight-month highs last week.
Some analysts say the jump in yields also reflects worries that the Federal Reserve will not withdraw the extraordinary stimulus it has provided the economy quickly enough to prevent a resurgence in inflation.
Interest-rate futures markets have begun to price in the possibility the Fed, which has held overnight interest rates near zero since December, would begin to raise borrowing costs before the end of the year.
But Lipsky said with the U.S. economy not expected to return to trend growth until the second half of the year and the output gap likely to widen further, there was no near-term pressure for the Fed to act on rates.
The IMF forecast U.S. core inflation bottoming at around 0.5 percent quarter-on-quarter in early 2010.
"We would interpret the recent rise in long-term rates, sovereign rates, as resulting from the effectiveness of policy in reducing fears of a really negative outcome," said Lipsky.
The severe domestic and global economic downturn lured investors into the safe-haven of U.S. Treasuries, away from riskier assets such as equities. With indications that the worst of the U.S. recession has passed, investors are moving back into stocks.
"This is the beginning of normalization of risk appetite for investors and restoration of the normal yield curve. In absolute terms, by historic standards, Treasury yields on the long-end are not high. They are still low," said Lipsky.
"This is a sign of not the inappropriateness of monetary policy, but rather something like the beginnings of a normalization process ... in financial markets as the fears and strains begin to recede," he said. (Reporting by Lucia Mutikani; Editing by Dan Grebler)