Treasury's Paulson: markets should set forex

WASHINGTON (Reuters) - U.S. Treasury Secretary Henry Paulson said he backs a strong dollar whose value is set by markets and played down fears China was taking advantage of the United States through its cheap yuan.

In a CNBC-TV interview taped on Wednesday and aired a day later, Paulson repeated a standard line that currency values should be set in competitive markets and should reflect the strength of a country's economy.

"I believe very strongly that a strong dollar is in our nation's interest and that our currency rates, like all currency values, should be set in a competitive marketplace based upon economic fundamentals," Paulson said.

The dollar was at a one-month high against the euro EUR= on Thursday, helped by Paulson's comments, but traders have had a negative attitude toward its value for some weeks.

Paulson was interviewed ahead of a scheduled panel session later on Thursday where he will emphasize the United States welcomes foreign investment and does not want investors to consider U.S. regulations as an impediment.

U.S. President George W. Bush added his endorsement of the bid to keep the United States open for investment. He urged foreigners not to be put off by the scrutiny of some applications on U.S. national security concerns.

"While my administration will continue to take every necessary step to protect national security, my administration recognizes that our prosperity and security are founded on our country's openness," Bush said in a statement.

Asked whether he was making progress in talks with China that are intended to help shrink a record U.S.-China trade deficit, Paulson said it was a long-term effort that would not be solved by having China let its currency appreciate.

Instead, he said the trade deficit stems from excessive savings in China, where citizens have little state-provided health care or other services so they are reluctant to spend and to buy foreign goods.

"The biggest factor in the trade deficit is ... savings rates of 50 percent and (the fact that) most of their growth is driven by exports and there's not a big enough domestic consumption portion to their growth," Paulson said.

Paulson, who meets a Chinese delegation in Washington on May 22-24 for economic talks, said currency was a "vitally important" component in relations between the two countries but not the primary one.

"We're talking about structural changes and having competitive capital markets (in China) will make a big difference there," he said.

Paulson's is trying to tamp down discontent on Capitol Hill among lawmakers upset over Beijing's apparent reluctance to let the yuan rapidly appreciate. U.S. manufactures also insist the yuan must rise in value to shrink an unfair price advantage that Chinese-made products enjoy in U.S. consumer markets.