NEW YORK -- U.S. Treasury Secretary Henry Paulson said on Thursday that investors should see recent rises in interest rates as a "wake-up call" but said underlying economic conditions were solid.

"As I look at the recent rise in interest rates, you can also look at it as a bit of a wake-up call to call attention to some of the potential excesses out there," Paulson said in response to questions after addressing the Council on Foreign Relations.

He acknowledged that there has been volatility in financial markets but said it was not worrying. "You're always going to see volatility, I tend to look at the underlying economic conditions which I believe continue to still be very good."

Asked about China's seeming reluctance to adopt a more flexible exchange rate for its currency, Paulson said he will keep pushing for it but that it was a long-term process.

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"There are a good number of countries in the world that don't have market-determined currencies, but China is by far the largest," Paulson said. "This has got to be a huge issue not only for the U.S. but for the rest of the world."

He suggested multilateral institutions such as the International Monetary Fund need to take a larger role in currency surveillance but conceded that, even if they do, China is "the elephant in the living room" because it does manage the value of its yuan currency.

"I do think this is not sustainable in the longer term. It is something we're going to have to resolve," Paulson said. "It won't be resolved during my 18 months here. I just hope there will be some progress."

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