Oil Price and the Dollar

Abstract

The aim of this paper is to test whether there is a stable long-term relationship between oil prices and the U.S. effective exchange rate, expressed in real terms. To this end, we perform co-integration and causality tests between the two variables. Our results show that causality runs from oil prices to the exchange rate. Moreover, as we investigate the channels through which oil prices affect the dollar exchange rate, we find out that the link between the two variables is transmitted through the U.S. net foreign asset position.

The impact of oil shocks on exchange rates: A Markov-switching approach

“…Early research on the relationship between oil prices and exchange rates often used cointegration techniques and many studies have found evidence of an appreciation of the US dollar in response to rising oil prices (e.g., Amano and Van Norden, 1998a ;Bénassy-Quéré et al, 2007;Chen and Chen, 2007;and Coudert et al, 2008). Coudert et al (2008) find that real oil prices, the real US dollar effective exchange rate and US net foreign assets are cointegrated. Based on their analysis, oil prices affect exchange rates through the impact that oil prices have on US net foreign assets.…”

Is there a homogeneous causality pattern between oil prices and currencies of oil importers and exporters?

“…Assuming that oil-exporting countries reinvest their revenues in US dollar assets, the dollar will appreciate in the short-run. However, the long-run reaction of the US dollar against other currencies is less clearcut and determined by the weight of oil in US total imports compared to the US weights in OPEC imports [Bénassy-Quéré et al, 2007;Coudert, Mignon and Penot, 2008]. Summing up the theoretical record, positive oil price shocks lead to a real appreciation (depreciation) of the exchange rates of oil-exporting (oil-importing) economies [Buetzer et al, 2012].…”

“…The relationship between the real oil price and real exchange rates against the US dollar has been analyzed for several countries in various studies covering diverse spans of data. Applying cointegration techniques, many authors have provided evidence of a real effective appreciation of the US dollar in the case of rising oil prices in the long-run [Amano and Van Norden, 1998b;Bénassy-Quéré et al, 2007;Coudert et al, 2008]. Clostermann and Schnatz [2000] focus on the real exchange rate of the dollar against the euro and also find indications of a real appreciation of the dollar in the case of a rise in real oil prices.…”

“…Positive effects may stem from an exchange rate-driven rise in the price of oil on drilling activities and production capacities, although the latter causality has changed over time. On the other hand, a depreciation of the domestic currency may reduce purchasing power and shift resources away from oil production, which would result in a decrease in supply [Coudert et al, 2008]. Although a direct distinction of this causality from the 'denomination channel' is not possible in our empirical framework, we will refer to this mechanism as the 'adjustment channel'.…”

Stock Markets and Energy Prices

“…Considering that a portion of oil export revenues is recycled back in the US in the form of investment (real and financial) could result in a stronger dollar. See Coudert et al (2008) for a survey of theoretical and empirical work on the relationship between oil prices and exchange rates.…”