President Barack Obama raised the prospect of a clash with China at a summit next week by calling for market-determined exchange rates, shortly after Beijing told the world not to criticize its currency policy.

Obama, in a letter dated June 16, urged G20 partners to redouble efforts on financial reform. In a reference to austerity measures in Europe, the U.S. president also said public finance problems should be addressed in the medium term -- a warning that clamping down on budgets should not be done at the expense of economic recovery.

Obama's letter, released on Friday, zeros in on prickly policy differences between the United States and two of its largest trading partners.

Washington has been pushing for Beijing to allow its yuan currency to rise more quickly and develop domestic demand rather than relying on exports for growth.

It has also diverged from Europe's biggest economy, Germany, by preaching patience in clamping down on public spending even as Berlin and other European capitals struggle to address public debt that has thrown the eurozone into crisis.

The signals that flexible exchange rates send are necessary to support a strong and balanced global economy, Obama wrote in the letter, referencing China without naming the country outright.

Market-determined exchange rates are essential to global economic vitality.

The Obama administration has stopped short of accusing China of manipulating its currency to give it a trade advantage, something that some members of the U.S. Congress have urged.

The Treasury Department delayed its regular currency report to Congress, which was due in April, angering some lawmakers who think the administration is dragging its feet.

CHINA WARNS AGAINST MEDDLING

China told the rest of the world on Friday not to meddle with the way it manages the yuan, calling the exchange rate a sovereign matter for it alone to decide and all but ruling it out of bounds at next week's G20 summit.

In the letter, Obama urged G20 leaders to accelerate financial reform and stand ready to respond quickly if necessary to avert an economic slowdown.

We must act together to strengthen the recovery, Obama said. We need to commit to restore sustainable public finances in the medium term. And we should complete the work of financial repair and reform.

He said the United States wanted G20 negotiators to agree to more stringent capital and liquidity requirements for financial institutions, stronger oversight of derivatives markets, and a framework for winding down large global firms and getting the financial sector to pay for the burdens it creates.

Obama said the group's highest priority during its June 26-27 meeting should be to safeguard and strengthen global economic recovery.

He said G20 leaders must reaffirm their support to provide the policy support necessary to keep economic growth strong.

Should confidence in the strength of our recoveries diminish, we should be prepared to respond again as quickly and as forcefully as needed to avert a slowdown in economic activity, he said.

(Additional reporting by Emily Kaiser, Editing by Kristin Roberts and Will Dunham)

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