Question: I came across a paper, not sure it originated from academia or a blog or such, that reported on applying principal components to build currency baskets from a set of individual currency pairs and to identify driving currencies. When I use the term basket then I mean a collection of individual cash fx pairs and to relate them linearly or non-linearly through different aggregator functions and weights. I am not talking about basket options here.

Has anyone come across such literature/paper/treatise/blog? I have spent a considerable amount of time in this area and only skimmed through that particular article, thought I had it bookmarked but apparently lost it. I am very interested in other related literature as well. 

Thanks

Answer: 
Perhaps [this paper](http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2400219) by Hyun Woo Byun and coauthors is what you're looking for: *Using a Principal Component Analysis to develop Multi-Currency Trading algorithms in the FX market*

They apply principal component analysis to a currency basket of 9 pairs with a 2 month rolling window. In a second step, various techniques (logistic regression, decision trees, neural networks) are used to make a predictions of the first PCA component, using technical indicators as predictors.
Try the BIS, they are the experts in this area. <http://www.bis.org/statistics/eer/>

There are two papers there which explain the methodology behind their currency indices.