We already know it is doing 3D, HD wouldn't be much of a stretch. A GPU capable of 3D graphics should have the power to produce HD graphics as well.
In their dominance, the main thing Nintendo is missing now is graphics. In Japan people are moving away from the console so it would make sense for a Japanese company to make a handheld more powerful than their own console. Would it be costly? In a word: no! This is Nintendo we are talking about; all of their latest devices have gone out of their way to be affordable to the masses in order to appeal to those less likely to buy videogames. A hardcore gamer won't mind paying $300 for a 'balls to the wall' 3DS but the stay at home dad/mom who uses it for recipes, brain games, and a few games with their kids would mind and likely buy the iPhone for $200 and use apps for those things I mentioned. It's more after the two year $100 a month contract but upfront costs are important motivators.
Use Google to look at some videos of the Tegra 2 playing games in HD on tablets to see how easily mobile HD can be done. Cellphones, PMP's, and digital camera's are all currently capable of outputing HD--720p--and even displaying it to a certain degree and each manages to cost around $200. Yes the 3DS will likely be a combination of all three of those devices plus a game player but as I'm sure you know, the price of a system can be undercut to make money from its games and long term development. So, if you're a chip manufacturer and Nintendo wants your 3D capable-HD chip in their next 250 million selling system I think you're going to cut them a good deal, especially if your name is Nvidia and you're desperately trying to top Intel, VIA, Qualcomm, and AMD in the mobile CPU/GPU market.