Geithner pledges to work with Brazil on China

BRASILIA (Reuters) - The United States and Brazil will work together to pressure China on its undervalued currency, U.S. Treasury Secretary Timothy Geithner indicated on Monday in comments that reinforced an emerging alliance between the Western Hemisphere's two biggest economies.

Geithner cast his one-day visit to Brazil as part of a broader effort by Washington to work with allies to eliminate distortions left over from the 2008-09 financial crisis.

He avoided mentioning China by name. Yet Geithner attributed some of Brazil's recent trade problems to countries "that understand the value of having an undervalued currency" -- a clear reference to China's yuan -- and said that the United States was committed to seeking a solution.

"We have a common interest with Brazil and other emerging economies that growth is balanced," Geithner said at a seminar at a think tank in Sao Paulo.

"Brazil and other emerging markets cannot address these challenges by their own policy choices alone," he added. "It's now more important than ever that we work together."

New President Dilma Rousseff, who Geithner was set to meet later on Monday, has identified China's undervalued yuan as one of the biggest threats to Brazil's economic boom. A flood of cheap Chinese imports has eroded Brazil's trade balance while causing the loss of thousands of manufacturing jobs.

Since taking office on January 1, Rousseff has sought closer ties with Washington in part out of the hope that the combined clout of the countries will put more pressure on China to let the yuan appreciate faster, advisers say.

Geithner's visit is designed to lay the groundwork for the February 18-19 meeting of finance ministers and central bank chiefs at the G20 group of nations in France, as well as a trip by U.S. President Barack Obama to Brazil in March.

Brazil's economy grew more than 7 percent last year but is expected to expand at a slower pace in 2011 -- due in part to struggles in its manufacturing sector. Finance Minister Guido Mantega has decried a "currency war" as countries keep their currencies artificially weak and try to export their way out of the global crisis.

Recent monetary expansion by the U.S. Federal Reserve has also helped steer more capital inflows to Brazil, as investors in the developed world chase high yields in fast-growing emerging markets. Some of the distortions are also of Brazil's making due to high government spending and interest rates.

U.S. "THRILLED" WITH CHANGE IN RELATIONSHIP

Yet the focus on China signals that Brazil is likely, at least for now, to try to work with the United States on common causes and improve relations that were chilly for most of the past year under Rousseff's predecessor.

"The United States is thrilled with the language the Brazilian government has been using in regards to global economic issues, in particular, regarding China," said Mauricio Cardenas, director of the Latin America studies program at the Brookings Institution, a Washington think tank.

Rousseff is due to visit Beijing in April where she will raise the issue of the undervalued yuan, officials say.

Geithner said that countries such as Brazil that face an "out-sized burden" due to their strong currencies "may need to adopt carefully designed macroprudential measures" -- a reference to capital controls and banking regulations that Brazil has recently implemented to ease strong inflows.

Geithner said such measures had to be combined with fiscal reforms -- a reference to a large cut in public spending that Rousseff's government is expected to announce later this week.

Rousseff also wants to work with Washington against France's proposal to tighten international commodity market regulations, a move it argues benefits only wealthy food importers and could stifle output by major food producers.

Lael Brainard, a U.S. Treasury undersecretary who is accompanying Geithner on the trip, said Brazil and the United States share common ground on the G20 commodities agenda and want to keep the focus on improving market functioning.

"The approach that we'll want to take there is to improve transparency in the commodity markets," she said. "But it's with a view to making markets function more effectively as opposed to supplanting markets."

Geithner also spoke with Mantega, Brazil's finance minister, and will meet central bank chief Alexandre Tombini.

(Writing by Brian Winter; Additional reporting by Guillermo Parra-Bernal in Sao Paulo and David Lawder and Glenn Somerville

in Washington; Editing by Todd Benson, Andrea Ricci and Kenneth Barry)