“The U.S. dollar has depreciated against the euro and on a trade-weighted basis. The export sector of the U.S. economy has benefited and remains quite strong. Export growth has diluted - but not offset - the negative trend of the U.S. economy,” he said in a speech.

“In recent weeks we have seen some rebound of the dollar and I think that’s welcome,” he said in a question and answer session that followed the speech to the Southern Center for International Studies Young Professionals in Atlanta.

The dollar is the dominant world currency and represents a high percentage of global reserves.

“My expectation is that although there will be some gradual diversification into other currencies the dollar will remain the dominant currency and certainly a very prominent currency going forward,” he said.

The dollar has slipped to record lows against the euro and other major currencies this year as the Fed slashed interest rates to offset the fallout from a housing crisis that has chilled growth. Its benchmark overnight funds rate has been lowered since September to 2 percent from 5.25 percent.

“The U.S. economy is in the midst of a pronounced slowdown, with very little growth recorded for two consecutive quarters. The weakness was initially centered in the housing sector but has become more widespread,” Lockhart said.

He also described inflation as “elevated” due in part to higher energy and commodity prices.

“We expect inflation to abate somewhat in the second half and going into 2009 based upon our forecast of weak economic growth, clearly in the first half, improving in the second half but generally a below trend, below potential course of economic growth in this country,” he said. Much of Lockhart’s speech dwelled on prospects for global economic integration.

“Global economic integration has progressed in recent years to the point that a slowdown in the United States will unquestionably be felt, but not as severely as imagined by some,” Lockhart said.

“Domestic growth momentum in many emerging economies will attenuate the influence of U.S. weakness. And the accumulation of foreign currency reserves by these countries — the result of trade surpluses — provides an accessible resource to stimulate their own domestic growth to offset weaker exports, should that weakness materialize,” he said.

Lockhart also said there were good reasons why emerging economies were investing their foreign exchange reserves in more mature capital markets like the United States.

Lockhart said the money would keep flowing, citing a high appetite for savings, domestic currency controls, immature domestic banking systems and “the propensity of households in the United States to undersave and overspend.”

“In my view, we can expect these “upstream” capital flows to continue for some time,” he said.

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