Fed's Yellen says China's dollar worry "understandable"

(Updates with more comments)

NEW YORK, March 25 (Reuters) - China’s concern about the dollar’s value and U.S. economic policy is “understandable”, San Francisco Federal Reserve Bank president Janet Yellen said on Wednesday, adding China’s proposal to use the IMF’s Special Drawing Right more widely is “far from practical”.

“It’s quite understandable that country would be concerned” about the dollar due to the lack of diversification of its holdings, Yellen said in response to questions after a speech at the Forecaster’s Club of New York.

China’s central bank governor said earlier this month the world should consider the International Monetary Fund’s SDR -- a basket of dollars, euros, sterling and yen -- as a super-sovereign reserve currency.

Yellen said the proposal was “interesting,” but that the idea was “far from being a practical alternative” at this point.

Answering a separate question, Yellen said she was “stunned by the magnitude of the collapse in global trade.”

She said the global nature of the economic downturn meant a rebound would be much harder as recoveries from past crises, such as the Asian crisis, were often driven by a pick-up in trade.

“The fact this is a global downturn is very very challenging. I don’t think we’ve ever seen it before,” Yellen said.

She said the Fed has sufficient tools to withdraw liquidity from the system, such as paying interest on reserves, once the economy recovers, but said she would be happier if Congress gave the Fed the authority to issue its own debt. Yellen is a voting member of the Fed’s policy-setting committee this year.

Asked about the outlook for banks, she said they continue to face a challenging environment. “If the downturn remains severe there will be other categories of loans where we see delinquencies,” she said. “We can’t say all the losses are behind us.” (Reporting by Kristina Cooke, Editing by Chizu Nomiyama)