The U.S. Factor in Explaining and Forecasting Bilateral U.S. Exchange Rates

We identify a U.S.-driven factor using a monthly panel of fifteen bilateral exchange rates against the U.S. dollar since 1999. We find this factor is closely related to nominal and real macroeconomic variables, as well as financial market variables from the U.S. Using this factor alone, we show that the out-of-sample one-month-ahead forecasts outperform random walk forecasts for all currencies but the yen.