Currency values should be set in markets: Paulson

By Glenn Somerville

CAPE TOWN, South Africa (Reuters) - U.S. Treasury Secretary Henry Paulson said on Friday that Washington backed a strong dollar policy, adding it "goes without saying" that currency values should be set by the markets while he expected U.S. economic strength to bolster the dollar's value.

In remarks to reporters ahead of a weekend meeting of the Group of 20 nations, Paulson denied there was any significance in his dropping references in recent comments to the role of markets in setting currency values.

"That goes without saying," he said in response to a question before reiterating his backing for a strong U.S. dollar.

"I think I have been pretty consistent for a long period of time on a strong dollar," Paulson said, adding: "You heard the part 'Being reflected in currency markets,' right?"

The dollar has fallen 9 percent against a basket of major currencies .DXY to record lows in 2007, largely because of darkening prospects for U.S. economic growth during a sharp housing sector slowdown.

Some members of the G20, which includes both rich industrialized nations as well as key emerging market economies, have expressed concern at the dollar's broad decline and indicated it should be discussed at the weekend sessions.

Paulson, however, spurned a question as to whether the United States might favor intervention in currency markets.

"I would just say that I think I've been very consistent on a strong dollar," Paulson said.

Among topics he expected on the agenda for the G20 talks on Saturday and Sunday were the need to revive the Doha world trade negotiations and the role of sovereign wealth funds in global investment.

Paulson said he supported development of a "best practices" code for the funds, but stressed he favored as few restrictions on investment as possible.

The United States was making progress in working through financial turmoil stemming from problems in subprime mortgage markets, he said but stressed it will take time to do so.

In an earlier radio interview, Paulson warned that "parts of it will get worse before it gets better," referring to rising defaults among mortgages issued to less creditworthy borrowers.

A faltering U.S. housing sector was the biggest risk the U.S. economy faces, Paulson said, but issues in credit markets were also a potential hazard.

He said he will tell G20 participants that the United States was still working through market turmoil while risks are being reassess and repriced.

"My focus here is on orderly markets as this happens," he said, adding that the fact that major financial institutions were well regulated and had adequate capital is an advantage "as we work through this."

(Reporting by Glenn Somerville; editing by Gary Crosse)