China's central bank said on Friday that it expected the dollar to strengthen this year, but it raised the specter of worldwide asset bubbles and inflation.

In a lengthy report on the global financial markets, the People's Bank of China also warned that huge, hidden bank bad loans in the West could pose a threat to the global economy.

While the dollar is likely to rebound this year if the Federal Reserve raises interest rates earlier than other major economies and sovereign debt problems in the euro zone persist, huge U.S. fiscal and trade deficits could limit its gains.

Therefore, even if there is a rebound in the dollar, the rebound will be not be too strong.

The central bank said the ultra loose monetary policies, including quantitative easing adopted by major central banks, had pumped huge liquidity into the global financial markets.

Once the real economy turns better, the massive liquidity being released out will definitely add to inflationary pressure, the bank said.

It is an urgent task faced by central banks in the world to avoid the forming of asset bubbles and inflation.

The central bank also highlighted risks of downgrading of sovereign credit ratings in some major economies, including the United States and Britain.

Turning to energy and commodities, the central bank expected modest gains in crude oil prices as the world economic recovery was fragile, while there was limited scope for gold prices to rise.

There are still factors to push up gold prices in 2010, but the repeatedly refreshed high records in gold prices will depress demand, the central bank said.

(Reporting by Kevin Yao, Zhou Xin and Jacqueline Wong)

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