Sarkozy says dollar drop could lead to "economic war"

WASHINGTON (Reuters) - French President Nicolas Sarkozy on Wednesday accused the United States of standing by as the U.S. dollar falls, warning that risks of an “economic war” in global trade were rising.

“Those who admire the nation that has built the world’s greatest economy and has never ceased trying to persuade the world of the advantages of free trade expect her to be the first to promote fair exchange rates,” Sarkozy said in a speech to a joint session of Congress.

“The (Chinese) yuan is already everyone’s problem. The dollar cannot remain solely the problem of others. If we’re not careful, monetary disarray could morph into economic war. We would all be its victims,” Sarkozy said.

His comments came as the U.S. dollar dropped to a record low against the euro.

European businesses and some officials have complained that the euro’s strength is threatening to undermine growth in the euro zone.

The United States has repeatedly expressed its support for a strong dollar, and has said currency values should be set in open, competitive markets. However, some analysts believe Washington has welcomed the dollar’s decline, which is boosting U.S. exports at a time when a housing slump is weighing on economic growth.

Sarkozy is a frequent advocate of greater regulation of speculative investment vehicles such as hedge funds and he reiterated this position in his speech.

He said America should “denounce the abuses and excesses of a financial capitalism that sets too great a store on speculation ... (and) commit fully to the establishment of the necessary rules and safeguards. The America I love is the one that encourages entrepreneurs, not speculators.”

A report commissioned by Sarkozy and released in September said that France and Europe should be more assertive in pushing for tighter rules on hedge funds.

(Additional reporting by Kevin Drawbaugh)

Reporting by Susan Cornwell; Editing by Jan Paschal