The dollar is beating a swift retreat this morning after Bloomberg Businessweek published a late-June interview in which Donald Trump took aim at overvaluation in the currency, suggesting that he might take policy actions to depress it against the yuan and yen. The renminbi is inching higher, but the Japanese yen is up more than a full percentage point against the greenback, and most other majors are strengthening in relative terms.

This comes after yesterday’s June retail sales report provided another reminder of the golden rule in global economics: never, ever bet against the American consumer. So-called “control group” receipts – a key input in gross domestic product calculations – climbed almost four times more than had been expected, rising at the fastest pace since April last year in a sign that higher borrowing costs and a cooling labour market are failing to dent underlying household demand. The Atlanta Fed’s GDPNow model is now forecasting a 2.5-percent seasonally adjusted annual rate of expansion for the second quarter, up dramatically from a few weeks ago, and well above last year’s reading for the same period.

Policy rate expectations haven’t shifted meaningfully. Probabilities inferred from Fed Funds futures markets suggest that the Federal Reserve will deliver 64 basis points in easing by year end, equivalent to two and a half rate cuts. To us, this suggests that market participants remain convinced the economy will continue slowing, driving unemployment rates higher and putting pressure on central bankers to move policy into less restrictive territory.

The British pound is advancing against the dollar and euro after updated inflation numbers poured more cold water on prospects for an August rate cut from the Bank of England. Services costs – heavily driven by minimum wage increases and a Taylor Swift tour – rose 5.7 percent in the year to June, the same as in the prior month, remaining well above the Bank’s 5.1 forecast. Data out last week showed the economy growing almost twice as fast as had been expected in May. Gilt yields are climbing, and the exchange rate looks poised to challenge – and potentially hold – its one-year high as traders push easing cycle expectations further out.

Investors think a rate cut at next week’s Bank of Canada meeting has become overwhelmingly likely after yesterday’s June inflation report showed price pressures subsiding in a broad-based manner. Overnight index swaps are putting 85 percent odds on a second consecutive move.

After stubbornly resisting, we’re now inclined to agree. A number of under-the-hood details suggest that inflation could yet stage a US-style dead-cat bounce – on a three-month moving average basis, the Bank’s preferred measures of core price growth are showing signs of acceleration, and services costs are rising at an uncomfortable pace. But the Bank’s updated Monetary Policy Report – due for release with next week’s decision – will likely emphasise growth and employment risks while showing price growth converging with target over the medium term, giving Tiff Macklem and his colleagues room to begin easing rates now.

In and of itself, this doesn’t necessarily mean that the Canadian dollar will fall. A cut in the third quarter has been priced in for a while, and rate differentials between the US and Canada have narrowed in the last month as the US economy has shown more signs of slowing momentum. With investors shifting focus toward the timing of the Fed’s first easing signal, we think the currency could outperform once the Bank has delivered its decision.

The potential for political regime change in the US has come to dominate our conversations with clients and other market participants – quite understandably so, given the events of the last three weeks. With a second Trump administration becoming the base case for many investors, it is worth considering the vectors through which currency markets could be impacted.

Broadly speaking, we expect the chaos that characterised Trump’s first term to be dialled down somewhat (emphasis on “somewhat”) in his second. His team is far more experienced and familiar with the political system, meaning that campaign pledges – to cut immigration and deport illegal migrants, extend tax cuts, withdraw military support from allies, and apply steep tariffs against a range of trading partners – are more likely to reach the implementation stage. On the face of it, wider fiscal deficits, higher inflation and higher interest rates in the United States – paired with weakness in the country’s major trading partners – should boost the greenback, and this prospect has animated foreign exchange markets for months.

Yet there are rumblings of a change in strategy on the dollar itself. Trump’s running mate JD Vance has repeatedly suggested that the dollar’s role as a global reserve currency imposes costs on tradeable goods sectors in the US – a view that we are quite sympathetic to – and for many years, the former president and his advisors have complained that the currency is too strong, indicating that they will take steps to devalue it over time.

In practice, we’re not sure how this could possibly be executed. The likelihood of a 21st century version of the Plaza Agreement – in which other countries agree to raise exchange rates relative to the dollar – looks decidedly low, given Trump’s limited political capital abroad and penchant for transactional negotiations. Intervening in currencies issued by countries with open capital accounts would punish US allies without addressing underlying trade imbalances. And depressing interest rates by undermining the Fed’s independence would risk touching off an inflationary spiral.

But we think any reasonably plausible effort to deliberately lower the value of the dollar could threaten one of the US financial system’s greatest strengths – its ability to borrow global capital, invest it, and achieve big returns while paying lenders very little. The US runs a circa-$20 trillion net negative international investment position – it owes more to the rest of the world than it owns in claims – but runs a primary income surplus in most years, meaning that it typically earns positive returns on borrowed money. In essence, the US functions a bit like the world’s biggest hedge fund.

Unintended consequences could unfold. If international investors – people in emerging markets, autocrats in petrostates, central bankers, and institutional money managers in countries like Canada, among others – are suddenly forced to accept materially-negative currency risks when deploying money into the US after November’s election, global capital flows could be re-routed, triggering extreme volatility in currency markets. Today’s too-obvious bet on the dollar could face a difficult future.