The United States is strongly committed to a strong U.S. dollar and financial markets there are recovering from the subprime loan crisis even if the housing market has yet to touch bottom, U.S. Treasury Secretary Henry Paulson said on Tuesday.
Paulson, speaking at a forum in New Delhi, also said innovation in capital markets was desirable and a contributor to growth in the world's largest economy even though it had contributed to the subprime crisis.
His dollar comments come a day after the U.S. dollar slumped to a record low against a basket of major currencies and against the euro in response to expectations that the Federal Reserve will cut interest rates again this week.
"I'm strongly committed to a strong dollar," Paulson said in a moderated on-stage interview at the Fortune Global Forum, adding that currency rates should be set by open markets based on economic fundamentals.
Paulson, who did not use prepared notes, said China had work to do to get to a market-determined exchange rate, and needed more yuan flexibility in the meantime.
While many U.S. financial markets were functioning as normal in the aftermath of the subprime crisis that roiled global markets in July and August, Paulson said several, including high-yield debt, mortgage markets, highly structured debt securities and asset-back commercial paper, were not yet back to normal.
"All of those markets are doing better every day, as time goes on compared to where they were a number of weeks ago, but it is going to take a while to work our way through," he said.
Yet to Hit Bottom
He said that the subprime mortgage market, where the crisis originated, would take longer to recover because of a large number of interest rate resets on adjustable-rate mortgages over the next 18 months.
He said the U.S. and global economies both remained strong, reiterating that the U.S economy would continue to grow as business investment remained strong and exports were increasing, although the U.S. housing market had not yet hit bottom.
"Six months ago, a year ago, people were more optimistic that we had hit bottom. We haven't hit bottom yet in the housing area."
While it was "definitely the case" that innovation in U.S. capital markets had gotten ahead of regulatory controls, contributing to the subprime crisis, Paulson said that such innovation remained desirable and was a hallmark of Wall Street.
"I don't think we would want it the other way around. If we had it the other way around, we'd be sacrificing growth and efficiency in the markets."
On his four-day visit, Paulson praised India for progress in economic reforms, while urging policy makers to accelerate their efforts to open the fast-growing economy to foreign competition.
In a brief session with reporters travelling with him, Paulson said he was encouraged by Indian officials' attitudes, saying that in a meeting with members of parliament the talk had centred not on the direction of change, but the pace of change.
"I am optimistic that when I talked about these things, no one said 'you're wrong', everyone said 'you're right'," he said.
He said Indian approval of a nuclear energy deal with the United States, which has been delayed owing to political opposition in India, would be seen positively by global business, but he would not be drawn on whether business would view it negatively if the deal did not go ahead.
Leftist parties have threatened to withdraw support for India's coalition government if the nuclear energy deal went ahead, which could lead to the fall of the Congress party-led government.
Earlier, Paulson said the U.S. valued the fact that India was a vibrant democracy and said democratic processes needed to work for the country to come to a conclusion on the nuclear deal.
Last week, Paulson said growing ties between the United States and India were broader and deeper than any single transaction.
During his visit, he lauded India's flexible rupee exchange rate, saying it was helping to control domestic inflation, and warned that capital controls could have counter-productive effects.
However, he tempered his comments on India's new curbs on so-called participatory notes aimed at stemming the flow of anonymous foreign money flowing into its stock market. He said it was important that such rules be transparent and flexible.