The United States and Brazil will pressure countries that keep their currencies undervalued, Treasury Secretary Timothy Geithner said on Monday, reinforcing an emerging alliance between the Western Hemisphere's two biggest economies at the expense of China.

Geithner cast his one-day visit to Brazil as part of a broader effort by Washington to work with allies to eliminate economic distortions left over from the 2008-09 financial crisis. Both sides also used the occasion to forge a common stance on a French proposal to regulate commodity prices that Washington and Brasilia view with skepticism.

Geithner avoided mentioning China in public. Yet in private he urged Brazil to do more to lobby China to let its currency appreciate, arguing that a weak yuan was just as much a problem for Brazil as it is for the United States, according to a Brazilian official with direct knowledge of the discussions.

New President Dilma Rousseff has identified the undervalued yuan as a major threat to Brazil's economic boom. A flood of cheap Chinese imports, combined with a surge in the value of the Brazilian currency, has eroded Brazil's trade surplus while causing the loss of thousands of manufacturing jobs.

After meeting Rousseff in the capital Brasilia, Geithner said the United States and Brazil would work together on the global stage to build a more balanced and more stable, stronger multilateral economic system.

Rousseff and Geithner also agreed to work to strengthen economic ties, the latest sign of a renewed willingness by both sides to improve relations that were chilly for most of the past year under previous President Luiz Inacio Lula da Silva.

Since taking office on January 1, Rousseff has sought closer ties with Washington in part out of the hope that the combined clout of the countries will put more pressure on China to let the yuan appreciate faster, advisers say.

Geithner's visit was designed to lay the groundwork for the February 18-19 meeting of finance ministers and central bank chiefs at the G20 group of nations in France, as well as a trip by U.S. President Barack Obama to Brazil in March.

Brazil's economy grew more than 7 percent last year but is expected to expand at a slower pace in 2011 -- due in part to struggles in its manufacturing sector. Finance Minister Guido Mantega has decried a currency war as countries keep their currencies artificially weak and try to export their way out of the global crisis.

When Geithner broached the Chinese currency issue in their meeting, Mantega said Brazil was against manipulating exchange rates, a Brazilian government source told Reuters.

Recent monetary expansion by the U.S. Federal Reserve has also helped steer more capital inflows to Brazil, as investors in the developed world chase high yields in fast-growing emerging markets. Some of the distortions are also of Brazil's making due to high government spending and interest rates.

U.S. THRILLED WITH CHANGE IN RELATIONSHIP

Yet the focus on China signals that Brazil is likely, at least for now, to work with the Washington on common causes.

The United States is thrilled with the language the Brazilian government has been using in regards to global economic issues, in particular, regarding China, said Mauricio Cardenas, director of the Latin America studies program at the Brookings Institution, a Washington think tank.

Rousseff is due to visit Beijing in April where she will raise the issue of the undervalued yuan, officials say.

Geithner said that countries such as Brazil that face an out-sized burden due to their strong currencies may need to adopt carefully designed macroprudential measures -- a reference to capital controls and banking regulations that Brazil has recently implemented to ease strong inflows.

He said such measures had to be combined with fiscal reforms -- a reference to a large cut in public spending that Rousseff's government is expected to announce later this week.

Rousseff also wants to work with Washington against France's proposal to tighten global commodity market regulations, a move it fears could stifle output by major food producers like Brazil and the United States.

Rousseff told Geithner that commodities shouldn't be blamed for imbalances in the global economy, according to a presidential spokesman.

Lael Brainard, a U.S. Treasury undersecretary who accompanied Geithner on the trip, said Brazil and the United States share common ground on the G20 commodities agenda and want to keep the focus on improving market functioning.

(Writing by Brian Winter and Todd Benson; Additional reporting by Guillermo Parra-Bernal in Sao Paulo and David Lawder and Glenn Somerville in Washington; Editing by Kenneth Barry and Diane Craft)

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