Dollar Up or Down

There is a race to the bottom on currency values. The lower your currency goes in relation to other currencies the better off you are exporting as your goods are cheaper. Yet, here is a reason why the U.S. may not be in a position to devalue and may, instead, have an incentive to go the opposite direction slowly but surely. This seems the wrong thing to do, right? Well, if we want anyone to buy Treasuries, probably not. Eventually fear will not cause a flight to Treasuries. Indeed, fear may at some point drive a flight in the opposite direction.

So you need something to keep people buying Treasuries. Well, the rates certainly are not going to do it at the moment. Recently some people were essentially paying the U.S. government to hold their money for them and that is not going to last for long. When people start deciding there are better places for their money - which they are already in the process of doing - then they will need an incentive for buying Treasuries. Foreigners, especially, are not going to buy Treasuries at very low rates when the dollar is devaluing, as that is a losing proposition. But if the dollar is rising gradually in value against their currency, they a Treasury investment, even at low interest rates, is providing growth through currency exchange rates. And since the U.S. desperately needs to sell Treasuries for years to come, this might be the tool of the day for them to do it, and perhaps the only way.

http://suddendebt.blogspot.com/2009/01/linked-bonds-and-fx.html