ECB's new US financial conditions index gives the dollar the smallest weight
Victoria Shinder2 min readThe European Central Bank has extended its Macro-Finance Financial Conditions Index, originally built for the euro area, to the United States, in a box in its Economic Bulletin published on 24 September. The motivation is spillovers: the authors note that market expectations for US policy rates swung in both directions over the summer, and that a large body of research finds US monetary policy shocks are transmitted strongly to euro area financial conditions.
The index combines a set of market prices in one number scaled like a policy rate: the effective federal funds rate, the ten-year Treasury yield, two real Treasury rates, mortgage and corporate bond spreads, the cyclically adjusted price-earnings ratio for equities, and the dollar's nominal effective exchange rate. Interest rates dominate. The fed funds rate carries the highest coefficient, 0.63, the two real rates about 0.45 each and the ten-year yield about 0.40; the spreads come in at about 0.11 each; equity valuations enter with a negative sign, since higher prices mean looser conditions. The dollar receives the smallest positive weight, which the authors attribute to the relatively low trade openness of the US economy and the dollar's role as a global currency.
Tracked back to 1999, the index tightened most in the 2022-24 hiking cycle, loosened through 2025 as the Federal Reserve cut rates, and tightened again after the outbreak of war in the Middle East; the latest data point is 28 August 2026. Compared with the euro area index, the two move broadly together, mostly through risk assets. The exchange-rate channel, by contrast, lowers the correlation during periods when ECB and Fed policies diverge.
What it means
The weights say something about how the dollar enters the US economy compared with others. For a large, relatively closed economy whose currency is used worldwide, the exchange rate is a minor input to domestic financial conditions; interest rates and credit spreads carry the weight. That is the reverse of the situation for smaller open economies, where the currency is often the main channel.
The more practical finding concerns the link between the two sides of the Atlantic. When the ECB and the Fed move in the same direction, their financial conditions move together; when they diverge, the exchange rate is what absorbs the difference. That makes the currency the indicator to watch when the two central banks' paths separate - and it is a description of past co-movement in the ECB's model, not a forecast of where either currency goes next.