President Bush said yesterday that China would be "foolhardy" to attempt to depress the dollar in retaliation for U.S. pressure over Beijing's reputed currency manipulation.
Mr. Bush said he had not seen the London Daily Telegraph report that Beijing was hinting at such a move but warned against any attempt by China to hit back at Washington using vast foreign currency reserves.
"That would be foolhardy of them to do that," Mr. Bush said in an interview with Fox News, adding that he doubted the report was based on sources from the office of Chinese President Hu Jintao.
"If that's the ... position of the government, it would be foolhardy for them to do this," Mr. Bush said.
Treasury Secretary Henry M. Paulson Jr., meanwhile, told CNBC that suggestions that China was considering selling off dollar denominated assets to hammer the already weakened U.S. dollar were "absurd."
"We have tensions and we have to deal with tensions on both sides ... but overall, both of our countries are committed to a constructive economic relationship," said Mr. Paulson, who returned from talks with top leaders in China last week.
China said last Friday that it would not be pressured into currency reform as Washington and the U.S. Congress renewed calls for it to speed up changes to make the yuan more market-oriented.
The Telegraph reported that two officials at leading Communist Party bodies had given interviews in recent days warning that Beijing might use more than $1 trillion in foreign reserves as a political weapon in the event of U.S. sanctions designed to punish Beijing for yuan manipulation.
Described as China's "nuclear option" in the state press, such a move could trigger a crash of the weakening greenback and a spike in U.S. bond yields and interest rates, which could then dampen the beleaguered housing market and plunge the world's richest economy into a recession.
When asked whether such an option would hurt China more than the United States, Mr. Bush said, "Absolutely. I think so."
China reportedly holds more than $900 billion in U.S. Treasury securities.
Mr. Bush said the United States and China could resolve their differences "in a cordial way" as opposed to the reported option by Beijing of liquidating its vast dollar holdings or through legislation imposing sanctions on China.
He cited a high-level "strategic economic dialogue" headed by Mr. Paulson and Chinese Vice Prime Minister Wu Yi as an effective channel to discuss differences between the two powers.
As a result of those discussions, China has been speeding up the slow mechanism it now has in place for allowing its currency to appreciate. The yuan has gained about 9 percent since July 2005, and is projected to appreciate another 6.6 percent in the next year, according to currency futures markets.
U.S. critics of China say the yuan is undervalued by as much as 40 percent, making Chinese exports cheaper.
Mr. Bush said the two powers had "a very complex trading relationship" and that it was "very important" for the U.S. economy to have access to the vast Chinese market. He said Chinese goods had been beneficial for U.S. consumers as they had helped hold down inflation, particularly in the face of rising energy prices.