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U.S. Treasury's Taylor sees no threat of deflation

NEW YORK, June 5 (Reuters) - The U.S. economy is unlikely to succumb to deflation as stimulative tax cuts and low interest rates spur growth, U.S. Treasury Undersecretary for International Affairs John Taylor said on Thursday.

"I see the (U.S.) economy is starting to pick up and growth will be stronger toward the end of this year and next year, so I don't see a problem," he said in a televised interview with CNN-fn.

He added that if there were another economic slowdown, there would be "other factors to look at" though he did not specify what factors the government might look at.

"But we don't see that, and in the situation where inflation or deflation is really a monetary phenomenon, central banks have every capability of preventing it and I believe they can and will," he said.

Taylor clearly distinguished between the deflation that has beset Japan and the situation now existing in the U.S.

"Deflation's been a problem in Japan for seven or eight years and they really have to deal with it. It's been a real drag on their economy. I don't see deflation coming in the United States," Taylor said.

Deflation, a sustained fall in prices, has become a hot topic since the Federal Reserve warned last month of the risk of falling inflation to the economy, which is still weak.

Taylor reiterated the words of President George W. Bush at the meeting of the Group of Eight in the French town of Evian earlier in the week on the need for countries to spark growth.

"The President made it clear, and (Treasury) Secretary (John) Snow made it clear, and I think think the real message to come out of that summit is how important it is for every country to raise growth. It's the most important thing for the world economy right now," Taylor said.

When asked if there would be any change in the government's strong dollar policy given the greenback's current weakness, Taylor said it was the domain of the U.S. Treasury Secretary to comment on monetary and currency issues.

"The dollar has changed by different amounts against different currencies and that's basically how it should happen. The main things is both the Secretary of the Treasury and the President have made it clear that there is no change," he said.

The dollar has lost some 13 percent against the euro (EUR=) in the year to date.

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