China's yuan currency is gaining importance in international trade and investment and might ultimately challenge the U.S. dollar, European Central Bank Executive Board member Yves Mersch said on Wednesday.

Speaking at a conference on the renminbi, or yuan, in Luxembourg, Mersch urged the Chinese government to continue reforming its economy and its financial sector because the yuan was taking the first steps towards establishing itself as an international investment currency.

"If it can do so successfully, it might one day become a leading reserve currency," Mersch said in a text of a speech.

"Due to the size of China's economy and its importance in global trade and, potentially, finance, the renminbi might ultimately come to challenge the U.S. dollar," Mersch added.

Luxembourg is competing with other European financial centers, including London, for a major role in the growing market for offshore yuan.

Mersch said from a eurozone perspective, the yuan's growing internationalization also called for closer monitoring of risks stemming from increased exposure to yuan-denominated assets and liabilities in eurozone banks.

"The increasing presence of Chinese banks within the euro area also brings its own challenges regarding banking supervision, including the need for greater cooperation and exchange of information between home and host authorities," Mersch said.