WASHINGTON President Barack Obama believes China is "manipulating" its currency, his choice to head the U.S. Treasury said on Thursday using a term the Bush administration had deliberately avoided for years to describe Beijing's foreign exchange practices.
Washington will "aggressively" use all its diplomatic tools to press Beijing to move faster on currency reform, New York Federal Reserve Bank President Geithner said in response to written questions from the Senate Finance Committee, which voted 18-5 on Thursday in favor of his nomination.
"President Obama -- backed by the conclusions of a broad range of economists -- believes that China is manipulating its currency," Geithner wrote.
The Treasury nominee also reiterated the long-standing U.S. currency policy mantra that a strong dollar was in the United States' interest.
The dollar trimmed losses versus the yen but U.S. Treasury bond prices fell on worries China could respond to Geithner's frank comments by dumping U.S. Treasury bonds.
Given the entangled U.S.-China economic relationship, that's an unrealistic fear, said Chris Rupkey, chief financial economist at Bank of Tokyo/Mitsubishi UFJ in New York.
"China holds so many Treasuries they would only drive prices down and shoot themselves in the foot if they attempted to exit the U.S. Treasury market," Rupkey said.
Still, provoking China on the currency front carries risks for the Obama administration, which will need Beijing's cooperation on a number foreign policy and economic concerns.
Many U.S. lawmakers believe China's yuan is significantly undervalued, giving Chinese companies a big advantage in international trade. They often blame Beijing's currency and trade practices for U.S. job losses and the huge U.S. trade deficit with China which hit a record $256.3 billion in 2007.
Under former President George W. Bush, the Treasury Department urged Beijing to move to a market-determined exchange rate and saw some progress since July 2005.
But to the frustration of lawmakers and manufacturers, it repeatedly refused to formally label China as a currency manipulator in a report due each April and October. Bush officials also avoided using the term in public.
Under U.S. law, labeling China as a currency manipulator would require the Treasury Department to begin "expedited" negotiations with Beijing -- either bilaterally or through the International Monetary Fund -- to reduce China's huge trade surplus with the United States and eliminate any "unfair" currency advantage.
The step could also give a green light to members of Congress to draft legislation making it tougher for Chinese goods to enter the United States.
As a senator, Obama backed new legislation that would designate currency manipulation as a subsidy under U.S. trade law. If approved, that would open the door for U.S. companies to seek import duties on a broad array of Chinese goods.
While willing to use the word "manipulating" to describe China's currency practices, Geithner said the administration was still evaluating how best to persuade China.
"The question is how and when to broach the subject in order to do more good than harm. The new economic team will forge an integrated strategy on how best to achieve currency realignment in the current economic environment," he said.
China's currency will be an important topic in U.S. discussions with Beijing, "given the crisis the immediate focus needs to be on the broader issue of stabilizing domestic demand in China and the U.S," Geithner said.
His responses to the Senate panel also contained a statement on the U.S. dollar used by both Democratic and Republican administrations of the past two decades.
"A strong dollar is in America's national interest. Maintaining confidence in the long-term strength of the United States economy and the stability of the U.S. financial system is good for America as well as our trading and investing partners," Geithner said.
But Ashraf Laidi, chief market analyst at CMC Markets in London, said he saw a contradiction in Geithner's support for a strong dollar and his criticism that the yuan was too weak, especially at a time when the United States needs China to buy new debt to finance stimulus spending.
"Also, I think it would be a hard sell to label China as a currency manipulator at a time when its growth has slowed from 11 percent a year to 6 percent," Laidi said.
(Reporting by Tim Ahmann and Emily Kaiser in Washington and Steven C. Johnson, Ellen Freilich and Wanfeng Zhou in New York; Editing by Chizu Nomiyama)