U.S. Treasury Secretary Henry Paulson said on Friday that a strong U.S. dollar was in American interests and said he was optimistic the U.S. economy would continue to grow this year.

The Canadian dollar hit parity with its U.S. counterpart on Thursday, in part thanks to a steady decline in the greenback that has also cut its value against the Euro.

"I feel very strongly that a strong dollar is in our nation's interest and we believe currency values should be set in a competitive market place based on underlying economic fundamentals," Paulson told reporters after a meeting with Canadian Finance Minister Jim Flaherty.

Paulson, who was in Canada to sign a new tax treaty between the two countries, also said he was upbeat about the prospects for the U.S. economy.

"The housing slowdown in the U.S. and the capital markets turbulence we're going through right now will take a penalty to our growth, but, again, we're diverse and I'm very comfortable that we're going to continue to grow throughout this year," he said.

"We have an economy where inflation is relatively constrained and in my judgment that's key to prolonging economic expansion."

Flaherty said the international financial community was still working through issues causing market turmoil and deflected questions about the high Canadian dollar, which has risen rapidly to reach parity with the U.S. dollar.

"It is a market currency, the Canadian dollar is, and I leave it to the markets to take into consideration all of the variables, and that's a matter for the markets to determine," he said.

Paulson, who said he thought the Canadian economy was very healthy, repeated that Washington was open to temporarily allowing the biggest U.S. home finance companies to buy larger loans, but only if this was accompanied by reforms.

"I said (to those backing the idea) we were open to that because it would help jump start that market but we were only open to it if it was part of a strong reform package and if it was only a temporary lifting, because to go beyond temporary raises public policy issues," he said.

"Anything more than that would be a mistake," he said. The proposed relaxation would allow the two government-sponsored enterprises, or GSEs, Fannie Mae and Freddie Mac to temporarily invest in so-called jumbo loans.

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