* Minister tells Reuters FX must reflect fundamentals
* Says this also true for dollar and yuan
* G20 must stop currency dispute escalating
(Adds details, further quotes)
By Gernot Heller
BERLIN, Oct 21 (Reuters) - Foreign exchange rates, including the dollar and yuan, must reflect economic fundamentals, German Economy Minister Rainer Bruederle told Reuters on Thursday ahead of a meeting of G20 finance and central bank chiefs.
"Exchange rates must reflect economic fundamentals. That goes for all currencies, including the U.S. dollar and yuan," he said in an interview ahead of the meeting on Friday and Saturday in South Korea.
"We need flexible exchange rates and free capital movement as we head towards a stable global economy and seek to dismantle global imbalances," Bruederle said.
The meeting of Group of 20 finance ministers comes at a time of renewed fears of a trade war which could see countries devaluing their currencies to boost exports.
There is speculation that a full summit of the group's leaders in Seoul next month could come up with a grand bargain to deal with the currency issues and rebalance the global economy next month.
"A currency dispute can quickly turn into a trade war. All G20 states together bear the responsibility of preventing an escalation," he said.
The United States, which has taken a hard line on the issue, said on Wednesday it wanted the G20 ministers to commit to allowing market forces to set currency values. U.S. Treasury Secretary Timothy Geithner said major world currencies were "roughly in alignment".
Policymakers hope that by persuading major emerging and advanced economies to cooperate on foreign exchange policies, they can coax China into allowing the value of its currency to rise.
Brazil imposed tax measures this week to try to push down the value of its currency, while Japan intervened in foreign exchange markets last month to curb gains in the yen.
Bruederle also advised against overloading the International Monetary Fund with tasks, saying it would not be a good idea to put a global central bank or insurance agency under the auspices of the Washington-based global lender.
The minister said he believed China, Japan and India were showing strong interest in progress in the long-stalled Doha talks on global trade.
(Reporting by Gernot Heller, writing by Annika Breidthardt; editing by Patrick Graham)