Understanding this indicator
Currencies are the link between economies and their financial markets. Trade payments, interest-rate differences and cross-border investment all create demand for one currency relative to another. Some currencies move largely on local developments, but many also share a broad movement against the US dollar. This indicator summarises that common currency cycle.
The calculation compares exchange rates with a year earlier and puts their directions on a consistent footing: a positive underlying annual change represents a stronger foreign currency against USD. Differences in long-term trend and volatility are adjusted before principal component analysis extracts the strongest shared pattern. The result reflects the currencies in the sample rather than the weights of a particular trade basket.
This perspective helps reduce the influence of a single exchange rate. A broad rise in the indicator means the sample’s common pattern is moving toward foreign-currency strength against the dollar; a broad fall means the reverse. The reading is a standardised measure of that pattern, not an exchange rate or the percentage return from holding a basket of currencies.
Compare the common line with an individual currency and with the Dollar Index. Where they agree, the move may be part of a wider dollar cycle; where they differ, local rates, trade exposure or exchange-rate arrangements may deserve closer attention. Looking alongside commodities and equities also helps show how the movement of money between economies fits into the broader economic cycle.
The green line isolates the 3–4-year Kitchin cycle from the historical data; it is a fitted cycle, not a forecast of the next turn. The lower chart shows the 7–10-year Juglar cycle and the 15–25-year Kuznets cycle. Comparing these time scales can reveal why a shorter upswing sometimes sits within a much longer period of weakness. The two main-chart axes use different scales, so compare their timing and direction rather than the height of one line against the other. Historical curves may change as the data are updated.