LONDON -- The U.S. economy may be showing signs of recovering from the financial crisis, but the jury is still out on the future of the U.S. dollar.
While many analysts expect the dollar to strengthen in coming months as the crisis fades and the U.S. economy turns toward growth, a growing chorus of investors is expressing concern about the longer-term outlook for the greenback.
In a new twist to an old refrain among economists, who have long worried about the effects of growing U.S. debt, they say that the huge liabilities the U.S. is taking on to dig its way out of crisis could ultimately undermine faith in the dollar.
"There has been a lot of disappointment with the way the U.S. credit crisis was handled," says Claire Dissaux, managing director of global economics and strategy for Millennium Global Investments Ltd., a London investment firm specializing in currencies. "The dollar's loss of influence is a steady and long-term trend."
On Tuesday, the Obama administration added fuel to concerns about the dollar, saying the U.S. will run a cumulative budget deficit of $9 trillion over the next 10 years, $2 trillion more than it had previously projected.
"That's going to be negative for the dollar," says Adam Boyton, a currency analyst at Deutsche Bank AG in New York. President Barack Obama also reappointed Federal Reserve Chairman Ben Bernanke, whose efforts to rescue the economy have won praise, but have also entailed pumping large amounts of freshly created dollars into the financial system.
Investors and economists have long harbored concerns about the dollar's decline, especially in the beginning of this decade as the federal government and consumers ran up their debtloads to finance everything from foreign wars to flat-screen TVs. Last fall's financial crash suggested that such fears may be overblown: As markets plunged in the wake of the collapse of Lehman Brothers Holdings Inc., investors scrambled to stash their cash in U.S. Treasury bills, perceiving them to be the safest investments. That boosted the value of the U.S. dollar against many of its major counterparts.
Now, though, major investors like Berkshire Hathaway Inc. Chairman Warren Buffett and bond investment firm Pimco fear the government's fiscal and monetary stimulus programs could end up fueling inflation in coming years and hammering the dollar. Higher inflation eats up the returns of bond investments that provide a fixed interest income, making them less attractive to investors. Less demand for U.S. bonds could mean a weaker dollar.
Mr. Buffett, for example, worries that U.S. policy makers will fail to move decisively to curtail the nation's ballooning net debt, expected by some to rise to more than 75% of annual economic output by 2013. Instead, policy makers might tolerate higher inflation, which makes existing debts more manageable but would hurt the U.S.'s creditors, including China and Japan. In this scenario, investors would demand much higher interest when lending to the U.S. government, raising its borrowing costs and making further budget deficits harder to finance at a time when an aging population will sharply boost the costs of social security and government-sponsored health care.
Investors are also growing more comfortable with the idea of emerging economies like China, Russia and Brazil playing a bigger role in shaping international finance. Some analysts, including Pimco portfolio manager Curtis Mewbourne, say emerging economies have a unique opportunity to use the crisis to reduce their reliance on the U.S. dollar., which tends to account for the lion's share of their foreign-exchange reserves.
"Investors should consider whether it makes sense to take advantage of any periods of U.S. dollar strength to diversify their currency exposure," Mr. Mewbourne wrote in a recent note.
Earlier this year, China's central-bank governor called for moving toward a "super-sovereign" reserve currency, one not belonging to any particular country. Analysts generally see such an option as unrealistic, since the U.S. wouldn't want to give up its status as the main currency in which the world's central banks hold their reserves, and any new reserve currency would require a deep and developed market where it could be traded.
There aren't yet many signs that investors are leaving the dollar. China and Japan, the biggest foreign creditors to the U.S., loaded up on longer-term Treasury debt in June, according to the latest Treasury data. China, for example, bought $26.6 billion in notes and bonds, its biggest monthly buying on record.
"The Treasury rally suggests the U.S. is facing neither an inflationary explosion nor a crisis of confidence," analysts at French bank BNP Paribas SA said in a recent note.
The dollar has held its own against its major rivals in recent weeks. On Tuesday, one euro bought $1.4314, compared with $1.4293 on Monday and $1.4253 at the end of July.
Any dislodging of the dollar as reserve currency will likely happen gradually if it happens at all, analysts say. Investors like China would suffer major losses if they suddenly sold a large portion of their dollar holdings.
And a weak U.S. dollar would ripple far and wide, hurting the competitiveness of companies in export-dependent Germany and Japan. That could prompt policy makers there to voice concerns about the dollar's weakness to protect their own economies.
—Peter Stein contributed to this article.Write to Neil Shah at neil.shah@dowjones.com