Systematic exchange rate variation: Where does the dollar factor come from?

The share of systematic variation (SSV) in bilateral exchange rates varies greatly across currencies and over time (Verdelhan, 2017). We provide evidence of a strong link between variations in the SSV and variations in our measures of the relative influence of the euro vs. the U.S. dollar over other currencies. The strong link is mainly due to the facts that (i) the average exchange rate change against the dollar, called the dollar factor, is a main driver that generates variations in the SSV and (ii) the dollar factor is strongly positively correlated with the euro/dollar exchange rate changes.