Treasury-Dollar Conundrum

The best finance/markets blogger in the business treats us to some lengthy reflections on the US dollar today. Currencies are above my pay grade - I only understand them insofar as I understand supply and demand - and, as such, I am at a loss to explain why treasuries have not only held up but appreciated in the face of the crashing dollar. I suspect it has something with QE2 and the Chinese's trade position (as SG notes, the Chinese pretty much have to grin and bear it). Still, you would think that deteriorating US creditworthiness, incipient inflation and a modest but relatively consistent economic recovery would be a surefire recipe for rising bond yields. Apparently, treasury buyers don't see any of it - they don't believe in the, albeit modest, recovery, or they don't see inflation (I guess they don't eat at the California Pizza Kitchen), and/or they don't fear US fiscal deteroriation. Far be it for me to question others' views, we have markets to sort this all out, but the bond market historically does not have a good record of recognizing inflation. Also, I think we have moved beyond an era of benign "politics as usual" where we can reliably expect a mushy, middle of the road "solution" to periodic fiscal red flags, which the bond market has come to implicitly accept as the norm. So I think the bond market is missing a fair degree of political risk and hewing to the long-standing "risk on-risk off" paradigm. I don't think the critical insight here is to get the "risk on-risk off" balance right, it is to recognize a paradigm shift that produces a fallacy implicit in conventional understanding of risk. Treasury investors are misjudging the true amount of risk that resides at the "low risk" end of the scale. When the risk free/low risk end of the scale gets repriced, everything up the scale follows to keep historical risk premiums intact (of course, risk premiums, too, could be subject to a paradigm shift but let's deal with one at a time!). This implies bonds down and stocks up. Of course the conventional wisdom is saying just the opposite now. Sooner or later, I just don't see how the dollar's diminished mojo doesn't find its way into treasury prices. I'm sticking with my view.