UPDATE 2-China's yuan "manipulation" an issue -Geithner

(Adds details, background)

WASHINGTON, Jan 21 (Reuters) - Major U.S. trading partners should operate flexible exchange rate regimes and President Barack Obama will press China to let market forces play a larger role in setting the value of its currency, U.S. Treasury Secretary-designate Timothy Geithner said on Wednesday.

“I believe it is very important for the United States and for the global economy that our major trading partners operate with a flexible exchange rate system in which market forces determine the value of the exchange rates,” Geithner told the Senate Finance Committee at a hearing on his nomination.

His remarks came as the yen rose to a four-week high against the U.S. dollar and scaled a record peak versus the British pound, fanning fears that Japanese authorities might intervene to curb the currency’s advance. The yen touched its strongest level against the euro since March 2002 on Wednesday.

Lawmakers are worried that intervention by the Japanese would have a detrimental effect on the U.S. trade balance.

There is already unhappiness in the U.S. Congress with China’s perceived manipulation of its yuan currency, which critics argue is a major contributor to global trade imbalances.

Obama co-sponsored legislation last year crafted by two Senate Finance Committee Committee members -- Debbie Stabenow, a Michigan Democrat, and Jim Bunning, a Kentucky Republican -- that would define currency manipulation as a subsidy under U.S. trade laws.


If approved, that could open the door for the Commerce Department to impose countervailing duties on a broad array of Chinese and Japanese goods if the Treasury Department were to formally label either country as a currency manipulator in a semi-annual report due each April and October.

Asked by Bunning whether he thought China’s “manipulation” of its currency remained a serious concern, Geithner said: “I do believe it is a significant issue.”

China is the second largest holder of U.S. Treasuries, which some analysts see as a constraint on how much pressure the United States can exert to demand currency reforms.

“I believe that it is in the interests of the global economy, not just our interests, that our major trading partners move over time to a more flexible exchange rate system,” Geithner said.

“It will be an important, difficult challenge that I will face to try to figure how best to advance that, not just with China, with our other major trading partners as well.”


While the hearing on Geithner’s nomination only briefly touched on currency matters, the nominee made clear his desire to maintain the confidence of global investors.

With the government’s massive bailouts of banks and automakers, and an anticipated $825 billion package of spending and tax-cut measures, policy-makers are wary that foreign investors may lose their appetite for U.S. debt.

Geithner said it was critical to give investors around the world confidence that the government has the willingness and ability to bring its fiscal position back to a sustainable position over the next five years.

“I believe that confidence in the strength and integrity of our financial system, confidence in our commitment to fiscal prudence, and confidence in the value of our currency are absolutely critical to the fortunes of all Americans,” he said.

Paul Volcker, a former Federal Reserve chairman and economic adviser to Obama, also expressed concern about the possibility of undercutting the dollar as he testified in support of Geithner’s nomination.

“There are not only questions of avoiding waste of the taxpayer’s money as important as that is, there are also risks of undermining confidence in the dollar, raising fears of future inflation. They need to be recognized,” Volcker said. (Additional reporting by Doug Palmer and Alister Bull in Washington; Editing by Leslie Adler)