UNITED NATIONS - May 25, 2011 - The United Nations warned on Wednesday of a possible crisis of confidence in, and even a “collapse” of, the U.S. dollar if its value against other currencies continued to decline.

In a mid-year review of the world economy, the UN economic division said such a development, stemming from the falling value of foreign dollar holdings, would imperil the global financial system.

The report, an update of the UN “World Economic Situation and Prospects 2011” report first issued in December, noted that the dollar exchange rate against a basket of other key currencies had reached its lowest level since the 1970s.

This trend, it said, had recently been driven in part by interest rate differentials between the United States and other major economies and growing concern about the sustainability of the U.S. public debt, half of which is held by foreigners.

“As a result, further (expected) losses of the book value of the vast foreign reserve holdings could trigger a crisis of confidence in the reserve currency, which would put the entire global financial system at risk,” it said.

The 17-page report referred at another point to the “still looming risk of a collapse of the United States dollar.”

Rob Vos, a senior UN economist involved with the report, said if emerging markets “massively start selling off dollars, then you can have this risk of a slide in the dollar.

“We’re not saying the collapse is imminent, but the factors are further building up that we could quickly come to that stage if other things are not improving quickly on other fronts - like the risk of the U.S. not being able to service its obligations,” he told Reuters.

UN economists have for some time queried whether the dollar should continue to be the world’s sole reserve currency. Others have also expressed concerns about U.S. finances.

Standard & Poor’s threatened on April 18 to downgrade the United States’ prized AAA credit rating unless the Obama administration and Congress found a way to slash the yawning federal budget deficit within two years.

A downgrade would erode the status of the United States as the world’s most powerful economy and the dollar’s role as the dominant global currency.

Treasury Secretary Timothy Geithner said on Wednesday the U.S. government would “never default on its obligations.”

Assessing the broader global economy, the UN report said recovery from the 2008 financial crisis continued to be led by China, India and Brazil, but that their growth outlook was moderating due to fears of inflation and domestic asset price bubbles.

It took a slightly more optimistic view of world growth prospects than it did six months ago, forecasting 3.3% expansion this year and 3.6% in 2012, compared with 3.1% and 3.5% respectively.

The United Nations uses a different exchange rate calculation than the International Monetary Fund and the Organization for Economic Cooperation and Development, making its global growth figures slightly lower.

It boosted its forecast for U.S. gross domestic product growth this year from 2.2% to 2.6% but kept next year’s estimate steady at 2.8%.

The report cut Japan’s growth outlook this year by more than a third to 0.7% following March’s catastrophic earthquake, tsunami and nuclear plant crisis. It put damage to buildings and infrastructure at about 25 trillion yen (US$305 billion) or 5% of GDP.

Despite a recent surge in oil prices, it predicted that barring major disruptions from political unrest in the Middle East, they would level off at an average $99 a barrel this year - close to the price of U.S. crude on Wednesday - and fall to an average of US$90 next year.

“Supply and demand conditions do not warrant a continued upward trend,” it said.

Food prices have also been soaring but the report said better harvests were expected to moderate them in the second half of this year.