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Faithful
04-18-2011, 12:04 AM
"By suppressing Treasury yields, the Fed forces the exchange rate to bear the full weight of the adjustment."

"Importantly, the Fed's policy need not suppress real interest rates by more than a percent or two to create dramatic pressure on the dollar. One way to think about the price jump required by exchange rate overshooting is to think about a long-term bond. If a 10-year zero-coupon bond with a $100 face is priced to deliver 0% annually, it will have a price of $100. If investors suddenly demand the bond to be priced to deliver 2% annually, the bond must experience an immediate drop in price to $82. Once that price drop occurs, the selling pressure on the bond will abate, since it will now be expected to appreciate at a 2% annual rate."

http://www.hussmanfunds.com/wmc/wmc100823.htm