WASHINGTON, Oct 14 (Reuters) - The Obama administration is due to say on Friday whether it believes China manipulates its currency for an unfair trade advantage, a decision that could sour ties between the world's two biggest economies.
The Treasury Department is required by law to issue twice-yearly reports on the currency practices of the major U.S. trading partners by Oct. 15 and April 15 each year.
The U.S.-China Business Council said on Thursday it had heard from the Obama administration the latest report would be released on Friday, even though it is often delayed.
The last report was not issued until July 8, more than two months late.
The following are three options the administration could pursue and a look at the potential implications of each:
TREASURY DOES NOT LABEL CHINA A MANIPULATOR - PROBABLE
If the administration declines to label China a currency manipulator for the fourth time since Obama took office, it may keep an uneasy peace with Beijing at a time when financial markets are worried about trade and currency tensions.
But giving China another pass also risks making Obama look impotent on an issue he says is a real concern just as his fellow Democrats head into congressional mid-term elections on Nov. 2. Voter worries on the economy could shift control of the House of Representatives to Republicans.
The U.S. House has already passed a bill penalizing the imports of countries whose currencies are fundamentally undervalued. Declining to name China a currency manipulatorcould discourage the U.S. Senate from acting on its own currency bill by sending a signal that Obama is unlikely to sign the legislation, despite calling China a currency manipulator on the 2008 presidential campaign trail.
U.S. Treasury Secretary Timothy Geithner told lawmakers last month that citing China for currency manipulation would only have the effect of triggering consultations with Beijing. He noted the United States was already pursuing the issue bilaterally and through the International Monetary Fund.
However, many detected a change in Geithner's tone last week when he complained that China's behavior was discouraging other countries from allowing their currencies to appreciate. That has added uncertainty to the pending decision.
If the U.S. government holds off in naming China a currency manipulator, this should be a green light for continued selling of the U.S. dollar and buying of Asian currencies as investors breath a sigh of relief over the avoidance of a dispute between the United States and one of its main creditors.
TREASURY DELAYS THE REPORT - POSSIBLE
Geithner could delay the report, an option he used in April to give China more time to act on its own and something the administration of former President George W. Bush did several times when big international meetings were looming.
The upcoming G20 meetings on Oct. 22 and in November in South Korea provide a ready excuse, although it would be unusual for Treasury to announce a delay with so little time left before the report is due. For example, Geithner announced on April 3 that the report due on April 15 would be delayed until after Group of 20 meetings in June.
This option would buy the administration time to see what China will do. The yuan has risen about 2.5 percent since China depegged its currency on June 19 this year. If it continues to rise, Geithner may be able to argue to Congress that Beijing is committed to reform.
Geithner could argue that an extended delay -- perhaps to the end of the year -- would allow time for the administration to better assess China's progress. It also would put the onus on the Senate to decide whether to act or not.
If lawmakers return from the election and let the House bill die, as it will if the Senate does not pass it by the end of the year, the White House could say Congress had a chance to act on the issue but decided against it and it could take pressure off the administration to label China a manipulator.
A delay in the release of the report would be neutral to negative for the U.S. dollar because this would suggest that the U.S. government may be expecting an agreement for a stronger Chinese currency at the upcoming G20 meeting.
TREASURY LABELS CHINA A CURRENCY MANIPULATOR - UNLIKELY
Judging from the past, this is the least likely option. The Treasury Department has not named any country a currency manipulator since July 1994 when the administration of President Bill Clinton cited China.
However, President Barack Obama's administration has stepped up pressure on China in recent weeks to speed up appreciation of the yuan currency. The Treasury has focused its efforts on working with other Group of 20 nations.
If Washington labels China a currency manipulator, Beijing may consider the move a provocation and put at risk the chances of cooperation on the issue at a G20 finance ministers meeting next weekon and a leaders summit in Seoul on Nov. 11.
It could encourage the U.S. Senate to follow the House of Representatives and pass legislation to penalize imports from countries with fundamentally undervalued currencies when lawmakers return in mid-November from an election break.
The U.S. dollar and Japanese yen are expected to rise if the Treasury labels China a currency manipulator as this scenario is viewed as negative for risk appetite. Normally the prospect of the United States upsetting China, one of its largest creditors, would be negative for the dollar. However, The dollar and yen have tended to strengthen when investors become concerned about the outlook for global growth.
(Reporting by Doug Palmer; editing by Bill Schomberg)