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OTTAWA (Reuters) - The Bank of Canada expressed optimism on Wednesday that G20 nations would eventually make progress in talks to defuse global currency tensions and it also had sympathetic words for China, which is under huge pressure to let the yuan float.
Finance ministers from the Group of 20 meet in South Korea this weekend amid increasing fears of a trade war in which countries would devalue their currencies to boost exports.
Bank of Canada Governor Mark Carney said that if mishandled, stress over currencies could undermine an already patchy global recovery.
"It may not look like we're actually making progress because we're getting down into the real policy decisions," he told a news conference after the release of the central bank's latest Monetary Policy Report.
"This discussion, which is spilling over more into the public domain, on exchange rates is getting more tangible as well. I think we just have to be more relentless on this, constructive in the room, and we will ultimately, we should ultimately, make progress," he said.
The United States, which has taken a hard line on the issue, said on Wednesday it wanted the G20 ministers to commit to allowing market forces to set currency values.
There is no sign yet the G20 will come to an agreement at the weekend talks. Washington and others, including the Canadian government, are unhappy about China's policy of only letting the yuan currency appreciate very gradually.
Carney took a softer line than Canadian Finance Minister Jim Flaherty when asked about China and currencies.
"We understand the reasons for China's position, we understand the difficulty of movement, we understand the importance of a degree of gradualism in the movement," he said.
"But as part of rebalancing the global economy, increased flexibility of the (yuan) is absolutely essential and we're working with our partners to ensure -- including China -- that that is the case."
Earlier this month Flaherty said that "to have some countries noncooperatively, artificially creating export subsidies for themselves by holding down the value of their currencies" was dangerous in the longer term.
Benjamin Reitzes, an economist at BMO Capital Markets, said he thought Carney "sees Canada playing a role toward pushing others to where we are and to rely on their currencies to be more market based".
Brazil imposed tax measures this week to try to push down the value of its currency, while Japan intervened in foreign exchange markets last month to curb gains in the yen.
"Canada's going to try to play a leadership role among the G20 and try to get them -- China, Japan, Brazil -- to allow their currencies to float essentially, to be more market-based, instead of being determined by the government and policymakers," Reitzes said.
In the policy report, the Bank of Canada said it would have to consider any further interest rate hikes carefully, given the patchy global recovery, a weak U.S. outlook and expected curbs on Canadian growth.
The bank, which held its key rate steady at 1.0 percent on Tuesday after three consecutive increases, said the recovery would be weaker than it thought in July. It cut its quarterly economic growth forecasts until the fourth quarter of 2011.
Carney also said that the Bank of Canada may have some room under its current inflation-targeting mandate to tackle asset bubbles. Some analysts fear an extended period of low interest rates could cause future bubbles.
"We have a very clear mandate which is an inflation targeting mandate. We will manage monetary policy to achieve the inflation target. We don't do mandate creep," he said.
"There is some flexibility in terms of achieving the inflation target horizon, I would say under the current mandate, that would take into account asset price bubbles if appropriate."
Additional reporting by Jennifer Kwan in Toronto; editing by Peter Galloway and Jeffrey Hodgson