[MG]: The stronger the currency, the lower the interest rate. Investors outside the US will buy Treasuries at 5% if they have some assurance the dollar won't be devalued. If they think there is the danger they could take a currency hit and that the value of their bondholdings will drop, they will demand a higher premium. You're right that interest rates have to be high enough to sustain foreign buying, but the US is able to attract Chinese and other foreign capital at current rates, so they presently have no need to raise them.
[BW]> As for "consumer squeeze", I thought that ranked low
> among official concerns. Certainly the price of oil
> did not produce any great popular outcry.
[MG] If the dollar is devalued, the price of imported goods will go up and there will be knock-on inflationary effects at home as US firms feel free to adjust their prices. The Fed accepts this as a necessary trade off to improve American export competitiveness. Along with the other central banks, it also thinks a controlled devaluation of the USD would be positive for the world economy, the presumption being that higher prices would encourage Americans to save more and work down their accumulated debt. At the same time, the "savings glut" represented by Chinese and other foreign investment in US debt would be reversed and capital reallocated to the development of their own home markets, whose consumers would now find US products more affordable. A long-sought yuan revaluation would be the flip side of dollar devaluation.
The emphasis is on a "controlled" devaluation. The risk is that a run on the dollar could lead to a financial and economic crisis followed by the kind of destabilizing political outcry you mention..