Loss of dollar's role as world's dominant currency still far off, ECB's Knot says

AMSTERDAM (Reuters) - Some of the world's major currencies will try to compete with the dollar on the global stage and could even attract some investor flows but the dollar will stay the world's key currency for some time to come, Dutch central bank chief Klaas Knot said.

Some investors have reduced their exposure to the dollar in recent months, worried that trade tensions and erratic policy by the U.S. administration will ultimately erode the greenback's global reserve currency status.

But others argue that there is no alternative for now since the dollar market is far bigger than any other competitor, and the euro zone, the largest potential challenger, is simply too fragmented.

"There will be competition between currencies," Knot, the head of the global Financial Stability Board, told a conference on Tuesday. "But I think there is simply no alternative yet for the role that the dollar plays."

Knot, the longest serving member of the European Central Bank's Governing Council, argued that investors could reduce their dollar exposure but that in itself would not dethrone the currency.

"The starting point is that most international investors today are overweight in U.S. dollar because of the returns they've seen over the last 10 years," Knot said. "Maybe you will see a move for the more neutral weighing."

The euro zone could make its own currency a more attractive financial instrument but that would require a great deal of internal structural work to revive long-stalled integration efforts, he said.

"The daily turnover in 10-year US Treasuries is around 900 billion euro while the daily turnover in 10-year Bund is 30 billion," Knot said. "That tells you something about the liquidity of the market and the capability to hedge your risk."

(Reporting by Bart Meijer. Writing by Balazs Koranyi. Editing by Mark Potter and Gareth Jones)