Economy question on government bonds buying and USD selling

I refer to this article from yahoo news:

The dollar has been under pressure as investors bet that the U.S. Federal Reserve will enact a bond-buying program in early November. Buying bonds would drive interest rates and yields even lower, and tends to encourage dollar-selling.

So why is it that when government initiates bond buying, bond yields will fall lower? (Increase in demand? If so why?)

Did the lower yield from bonds reduce appeal to international investors of carry trades and hence the selling of dollars?

They are buying bonds, not "bond yields" . Demand for bonds grows and the bond prices grow. The yield is the difference between the bond's expiration (nominal) price and the market price. So, the yields are going down.

And also remember that investors are looking for the best return on their investment. As yields head lower in the US, money will flow out of the USD into higher yielding currencies. Take a look at the AUD and NZD vs. the USD how strong they are getting.

There is an inverse relationship between bond price and bond yield. For example:

The price of a bond is $90. In 1 year, it will expire and you will receive $100. If you purchase this bond, you will receive a 11% gain, or yield (ignoring coupon payments). You pay $90 and in 1 year receive $100 = 11% gain.



If the government purchases bond, it increases demand for the bonds, increasing the price of the bonds.



The price of the bond is now $110 after the government purchases. If you purchase the bond now, in 1 year you will still receive $100. In other words, your yield will now be -10%. You purchase for $110 and in 1 year receive $100.


A very simple example of how the government increasing their purchases leads to a decrease in yield.

Bond prices and bond yields are inversely correlated. When bond prices rise, bond yields fall and vice-versa.

Bond yields are a good indication of the strength of the U.S. stock market, which, in effect, affects demand of the U.S. dollar.

Demand for bonds usually increases when investors are concerned about the safety of their stock investments. This flight to safety drives bond prices higher and, by virtue of their inverse relationship, pushes bond yields down. As more and more investors move away from stocks and other high-risk investments, demand for "less-risky instruments" such as U.S. bonds and the safe-haven U.S. dollar becomes higher. You could say higher bond prices (and lower yields), is dollar bullish. On the other hand, higher yields and lower bond prices is dollar bearish.