The US on Thursday in a semi-annual report on exchange rate policies, said it had “serious concerns” about the value of the renminbi, but refrained from calling China a currency manipulator. Meanwhile, a veteran American economist says a reduction in the role of the dollar would benefit the US economy.

The Treasury acknowledged that China had played an important role in steadying the global economy, but the report said recent moves to accumulate more foreign exchange reserves “risk unwinding some of the progress made in reducing imbalances.”

China has effectively pegged its currency to the US dollar since mid-2008 to assist exporters.

The report says that of the 17 currencies examined, two (the Saudi Arabia riyal and the Venezuelan bolivar) are fixed against the US dollar. Among the remaining 15 currencies, all except the Norwegian kroner depreciated against the dollar in the first quarter of 2009, as capital flows to emerging markets declined and investors continued to shift their portfolios into dollar assets. During the second quarter of 2009, 14 of these currencies appreciated against the dollar, as improvements in financial market conditions and the global outlook led to a return to more diverse portfolios. Only the Chinese renminbi remained unchanged against the dollar in the second quarter.

"This lack of movement of the renminbi has contributed to upward pressure on more flexible currencies in the region. Several emerging markets in the region have intervened in the foreign exchange market to slow the pace of appreciation,"the report notes.

Treasury says on an effective basis, the renminbi has depreciated 6.9 percent since February 2009. From the end of February through June, China’s reserves increased both as a result of valuation changes and additional purchases associated with intervention. It says both "the rigidity of the renminbi and the reacceleration of reserve accumulation are serious concerns which should be corrected to help ensure a stronger, more balanced global economy consistent with the G-20 Framework. Treasury remains of the view that the renminbi is undervalued."

The report says officially, China operates a 'managed floating exchange rate regime based on market supply and demand with reference to a basket of currencies.' In the summer of 2008, however, China returned to a policy of maintaining a largely-stable renminbi-dollar exchange rate. Because the renminbi has remained stable against the US dollar in 2009, it has followed the movement of the dollar against other currencies. According to the index of the Bank for International Settlements (BIS), China’s real effective exchange rate appreciated 13.3 percent between June 2008 and February 2009, but it has depreciated on a real effective basis by 6.9 percent between February and August 2009. Since the end of the dollar peg in July 2005, the renminbi has appreciated a cumulative 21.2 percent against the dollar and 15.7 percent on a real effective basis, based on the BIS measure.

Last week, Asian central banks intervened in the currency markets to halt the rise in the value of their currencies against the US dollar, prompted by fear that they could be at a disadvantage in export markets, with China.

The trade deficit with China is a hot political issue and in Congress, seven senators and 69 House members are sponsoring bills that would make currency manipulation an “actionable” subsidy, subjecting China to a trade sanctions.

In the Financial Times today, columnist Sir Samuel Brittan writes: "Recovery depends on a rediscovery of investment opportunities – 'animal spirits' if you really must – reduced attempted savings or injection of demand by governments or central banks. China is not going to save less because of western lectures, which would be better directed to the political tyranny in that country. Until western consumers have reduced their indebtedness to reasonable proportions, demand must be supported by the monetary injections and budget deficits now in place, and possibly more of them. Thus the IMF is right to warn against premature withdrawal of these stimuli. British Tory Bourbons who want a draconian belt-tightening policy either have not read these warnings or think they know better.

Please note that I have got so far without once mentioning banks other than central banks. Commercial banks certainly worsened the recession by greedily seeking higher returns than those provided by market interest rates; and they can put grit in the recovery by refusing to lend. I can only suggest making Paul Krugman, the radical Keynesian economist, Comptroller of the US Currency with over-reaching powers to take over old banks and initiate new ones, with similar appointments in other countries."

Meanwhile, Fred Bergsten, who served in the Treasury Department during the Carter administration and is now head of the Peterson Institute for International Economics think-tank, is arguing that the dollar’s days are numbered. Writing in the magazine Foreign Affairs, he says, the dollar’s position as the default international currency has made it “much easier for the United States to finance, and thus run up, large trade and current account deficits with the rest of the world.” But the US trade deficit, along with the huge US budget deficit, laid the groundwork for the current financial crisis.  So he says it is now time for Washington to realise that “large external deficits, the dominance of the dollar, and the large capital inflows that necessarily accompany deficits and currency dominance are no longer in the United States’ national interest.” It’s time to start creating an international currency system that does not rely on the dollar, he concludes.

Complete article on think-tank site: The Dollar and the Deficits: How Washington Can Prevent the Next Crisis

An article published in the latest Quarterly Report on the Eurozone published by the European Commission (EC) argues that although the common currency area played a negligible role in the building up of global imbalances, it may be one of the casualties of the ongoing rebalancing process by strongly boosting the value of the euro during a period of fragile recovery .

US Treasury Secretary Timothy Geithner says the US needs to work to keep the dollar's reserve currency status. He speaks to CNBC's Maria Bartiromo in an exclusive interview on keeping the dollar's status:

SEE: Finfacts article Oct 14, 2009:European Central Bank drains €169.7bn in overnight funds from money market; Rising Euro increasing concern for ECB policymakers

SEE: Finfacts article Oct 09, 2009:Asian central banks intervene to slow fall of US dollar; IMF asks if large reserves helped countries during the financial crisis?

SEE: Finfacts article Oct 08, 2009:Dr. Peter Morici: The falling dollar and China’s cries for a global currency

SEE: Finfacts article Oct 07, 2009: Gold rises to a new record; Premature to expect end soon to dollar dominance

SEE: Finfacts article July 01 2009: China has pegged currency to US dollar since July 2008 to help exporters; Emerging markets expected to keep currencies undervalued as crisis risks recede