How to reconcile the following three statements? First, the US economy is in its worst shape since the recession of the late 1970s. Second, the market is almost certain that Democrats will take control of both Congress and the presidency for the first time since 1994. But, third, the dollar is rising.

None of these statements is deniable. Yesterday's ISM survey of manufacturing purchasing managers dropped far below bearish forecasts to 38.9 from 43.5. Anything below 50 signals a contraction. This is worse than anything since 1982.

As for the election, prices of futures that pay $1 if John McCain wins the presidency dropped below 10 cents on Monday. In spite of a frenzied last week of campaigning, markets now think his chances are less than 10 per cent.

Many pundits claim that a President Obama would be bad for markets, particularly in his trade policies. So how can these conditions co-exist with a strong dollar? Against a basket of currencies, the dollar is up 22 per cent since its low for the year. It rose strongly during Barack Obama's good weekend.

In part, this is because the economy is so bad. The market thinks the Democrats cannot go through with their more expensive plans.

And with the ISM showing that inflation is not an issue for now, they would be happy to see more expansionary economic policies.

Most critically, US investors, of all kinds, are buying dollars. Mansoor Mohi-Uddin, of UBS, shows that the dollar index correlates almost perfectly with the proportion that US mutual funds hold in non-US equities. The dollar underwent its long weakening as this proportion rose to 26 per cent; and it has strengthened as that proportion has fallen back to 23.5 per cent.

If the forex market really is worried about an Obama presidency, its apprehension is swamped by the tide of US investors' money coming home.