Beyond the Dollar: A Global Perspective on Exchange Rate Dynamics via Currency Factors

•Introduces currency factors framework to the connectdness literature for enhanced currency understanding.•Identifies Euro and Swiss franc as key shock diffusers in currency network.•Demonstrates Pound Sterling's role as a significant shock absorber in currency interactions.•Links peaks in aggregate currency return spillovers to major economic events.•Discloses insights for risk-sharing and international diversification strategies. This paper investigates the dynamics of currency exchange rates from a global perspective, by expanding on the concept of currency factors. Through the analysis of G10 currencies, we disclose the interconnections and patterns driving exchange rates, shedding light on the central role of the euro and Swiss franc in shock propagation. Furthermore, we observe that pound and yen factors have acted as net absorbers of spillovers from other currencies. Our findings suggest that currency factors provide valuable insights for international diversification, risk sharing strategies, and real-time indicators of foreign exchange market uncertainty.