US treasury secretary Henry Paulson said yesterday that a strong dollar is in the interest of the United States, and also said that China must do more to free up its currency, the yuan.

"I believe very strongly that a strong dollar is in our nation's interest, and the currency value should be determined in an open and competitive market based upon underlying economic fundamentals," Mr Paulson said in an interview on US television.

Currency markets were paying close attention to his comments on the dollar because, unlike his predecessors, Paul O'Neill and John Snow, Paulson had declined to use his US Senate confirmation hearing as a platform for publicly backing a "strong dollar" policy. In his first public comments since taking office last month, Mr Paulson also said China should press ahead with reform of its currency policy and allow the yuan to trade more freely to level the playing field in terms of international trade.

"The Chinese need to show more flexibility with their currency - there's no doubt about it," said Mr Paulson, who has visited China an estimated 70 times.

Increased flexibility in yuan trading would benefit the US and the rest of the world and help cool the Chinese economy, which "appears to be overheating", he said. "They have more work to do in developing their capital markets. We will encourage China to open their markets."

On the domestic front, Mr Paulson said he would pursue policies aimed at maintaining and increasing confidence in the US economy and at raising US productivity. "That's going to be my focus," Mr Paulson said.

Speaking only days after government data showed a sharp slowdown in economic growth in the second quarter, he flatly denied suggestions the US economy is facing a recession.

"Absolutely not," he said, adding the economy is growing, tax revenues are healthy and the budget deficit is being cut.

At roughly 2.3 per cent of gross domestic product, the fiscal deficit is in line with global averages, he said, adding, however, that spending must be reduced in the long run to ensure it doesn't widen further.