Using principal component analysis, we identify a common component
driving a panel of 15 monthly bilateral exchange rates against the US dollar. We find
this common (first principal) component is related to the fundamentals commonly used
in exchange rate determination models, such as US nominal and real macroeconomic
variables, financial market variables and commodity prices. We obtain the relevant
set of fundamentals using the Lasso (least absolute shrinkage and selection operator)
technique and find that this set changes over time.

• The common component of bilateral US exchange rates: to what is it related?