The war drum is being pounded in Washington, and Iraq is doing its best to delay what appears to be an imminent attack led by the U.S. War is being priced into the dollar, gold, stocks and bonds. But what isn't priced in is a "peaceful" regime change.

Surely, this is what the Bush administration is aiming to achieve with its war buildup. In our opinion, the U.S. will go to war with or without U.N. and NATO backing if Saddam Hussein is still standing come late January.

Saddam has invested heavily in his own security, and he is a survivor. He miscalculated badly in 1990 by invading Kuwait. We doubt he and those around him will make the same mistake in 2003. What we do expect to see is a significant reversal in gold, the dollar, stocks and bonds. Look to buy out-of-the-money options.

Dollar Policy

White House spokesman Ari Fleischer was finally forced to state that U.S. dollar policy hasn't changed. We suspect that this announcement was scripted intentionally and was flushed out by the drop in the dollar and media reports noting that the stock market decline was in part due to the greenback's struggles.

Significantly, the White House, rather than the U.S. Treasury, chose to enunciate that there was no change in dollar policy. The fact that Fleischer said it and not a Treasury official highlights an ongoing problem for the Bush administration.

The White House has been quite reluctant to delegate economic policymaking to the Treasury. Former Treasury Secretary Paul O'Neill was never given the nod to make policy, not even dollar policy. About the only thing he was given was plenty of rope, from which he managed to hang himself on several occasions.

The nomination of John Snow to fill the Treasury secretary post suggests more of the same -- no delegation of policymaking to the Treasury. Maybe our benchmark is wrong. Robert Rubin was an outlier as far as policymaking goes.

Still, it's hard to think of Secretary of State Colin Powell and Defense Secretary Donald Rumsfeld as having the same kind of say over diplomatic and defense policies as O'Neill had over economic policy. If O'Neill were to offer Snow any advice, it might be rent don't buy, and believe press reports, not the White House, when it comes to tenure.

Where does that leave dollar policy? Where it has been for much of the last seven years: in a closet, ready to be pulled out only when the decline in the currency threatens U.S. asset prices (stocks). When will it have any meaning (as in intervention)? When there is a current-account funding problem, which is arguably in the works.

Register Trouble

Retailers are reporting disappointing holiday sales. Perhaps it's too soon to conclude the U.S. consumer is running low on fuel, but it's hard not to think that is what's unfolding.

Equity refinancing is slowing substantially, and the boost to spending from this unprecedented mortgage-rate arbitrage by homeowners is finite. Throw in the failure of Congress to approve an extension in unemployment benefits, and the well-established jobless recovery, and this speaks volumes for near-term payroll-tax cuts.

But slowing consumer spending will fuel speculation of a double-dip recession and deflation. That can't be good news for the dollar or stocks, and it should keep bond yields low.
David Gilmore is an economist and partner of Essex, Conn.-based Foreign Exchange Analytics, a currency markets advisory service for institutional investors. Neither the author nor Foreign Exchange Analytics trades in the currency markets. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While he cannot provide investment advice or recommendations, he welcomes your feedback and invites you to send it to fxa@fxa.com.