Mission of the Fed is to ensure orderly functioning of the economy. If gradual devaluation of the dollar is what it takes, than that’s what it takes. There are worse things in life than devaluation. If you had to choose between $2 euro and 25% unemployment, what would you prefer?

Devaluation of the dollar is an unfortunate necessity. Many serious economists (e.g. Paul Krugman) warned that we had it coming for a few years. Basically, the story is that our current state of affairs (large trade deficits financed by foreigners buying low yield dollar-denominated debt) results in artificially overpriced dollar and is not sustainable indefinitely. Trade deficits must close, that can happen either through gradual currency devaluation or through sudden dollar collapse (aka “Wile E. Coyote Moment” – google it).

kicksavedave: rates are spiking because foreign investors are coming to realize that investing in the dollar is risky and they are demanding higher interest rates to protect them against devaluation. Interest rates will increase (maybe substantially, to 10% or more) and they will only come back down when dollar is sufficiently devalued and balance of trade is restored. Rate increase may help in the short run but the real underlying problem is long-term and it seems that the genie is out of the bottle.