By Anna Willard
PARIS, Feb 12 (Reuters) - G7 finance ministers and central bankers are keen to avoid upsetting troubled financial markets with squabbles over exchange rates at their meeting in Rome on Friday and Saturday, policymakers say.
Absent China and its management of the yuan will be the main focus of a regular discussion of currencies, after U.S. Treasury Secretary Timothy Geithner said the government was manipulating its currency for economic gain.
European officials, struggling with the strong euro, may also raise concerns about Japanese comments on yen strength as well as the recent weakness in sterling, but neither is likely to be mentioned in the final communique, policymakers say.
"Europe in its heart probably wants a weak currency. The United States also wants a weak currency given the current situation, and China must be the same," Japanese Finance Minister Shoichi Nakagawa told Reuters on Tuesday.
"It's the same situation for all, and it's no good unleashing a competition in currency devaluation."
An Oct. 10 statement by the G7 repeated the line that excess volatility and disorderly movements in exchange rates were bad for growth.
It also singled out China, urging the authorities to allow an accelerated appreciation of the exchange rate to rebalance the domestic economy and promote external stability.
Canadian Finance Minister Jim Flaherty told Reuters last week the communique from Rome would reflect policy makers' concerns about "the inflexibility of some Asian currencies".
LOOKING TO G20
The United States and Europe say China is deliberately keeping its currency weak to help its exporters. The International Monetary Fund has also said it is undervalued but that now is not the time to push the issue since it is not central to the financial crisis.
Officials from Germany, Britain, France, Italy, the United States, Canada and Japan will attend the Rome G7. Russia will also attend part of the meeting.
But China is not invited because, as officials put it, the G7 likes to keep the discussion on currencies to countries with a lot more in common, including floating exchange rates and independent central banks.
They also say there will be an opportunity to talk to the Chinese anyway at the March 14 and April 2 G20 meetings.
NO EXCESS
The yen has rallied broadly, hitting exports and helping to push the world's No. 2 economy deeper into recession.
Japan has not intervened in the market since 2004 but European officials say they are worried that Japan is sending signals that it is prepared to take action.
Nakagawa said the intervention question was "not in my mind now". But he sent a strong warning against rapid swings on foreign exchange and other markets, saying: "We hope to combat such moves decisively."
The G7 did single out the yen in another statement last October warning against sharp moves. But European officials say its recent levels are not extraordinary.
"If you do verbal intervention it's because you think there is a crisis situation. We're not at that point yet," a G7 source told Reuters last month.
Europeans have also welcomed sterling's recent stabilisation against other currencies.
French Economy Minister Christine Lagarde expressed her concern on Jan. 21, saying it would be in the Bank of England's interest to support the currency more. Two G7 sources also said last month this would be a topic for discussion at the meeting.
But those comments came when the pound
The pound was trading at $1.4179 at 0918 GMT and 1.1041 euros on Thursday, meaning that for the time being, the British currency is less of a concern.