Reassessing the empirical relationship between the oil price and the dollar

Abstract

We reassess the relationship between the real oil price and the dollar over the 1974-2015 period. Changes in the two variables are linked by a negative relationship over the whole period. The link between both variables is positive over the subsample ending in the mid-2000s. We estimate a nonlinear model in which the oil price-dollar nexus depends on the evolution the dollar. The relationship is negative most of the times, except when the dollar hits very high values.JEL classification: C22 F31 Q43 Keywords:Oil price Dollar real effective exchange rate Causality Nonlinearity a b s t r a c t This paper aims at reassessing the empirical relationship between the real price of oil and the U.S. dollar real effective exchange rate over the 1974-2015 period. We find that changes in both variables are now linked by a negative relationship, going from the dollar exchange rate to the real oil price. However, the same relationship is found positive when ending the sample in the mid-2000s, in line with the previous literature. To understand and investigate this evolution, we rely on a nonlinear, smooth transition regression model in which the oil price-dollar nexus depends on the dynamics followed by the U.S. currency. Our results show that the relationship is negative most of the times but turns positive when the dollar hits very high values, as in the early eighties.

Forecasting Long-Term Crude Oil Prices Using a Bayesian Model with Informative Priors

“…Moreover, its influence and control power on oil price increases gradually and further strengthens after the global financial crisis in 2008 [62]. Many studies demonstrated a negative relationship between oil prices and the US dollar exchange rates [60][61][62][63][64][65][66]. Possible linkages between the dollar index and oil price are suggested by Chai et al [62].…”

“…Other studies also found that movements in US dollar exchange rates influence commodity price changes [57][58][59] and oil prices are no exception. While researchers have focused on various factors that influence international oil prices, the US dollar index is included as a major variable and is confirmed as an important factor for oil price changes [60][61][62][63][64][65][66]. Moreover, its influence and control power on oil price increases gradually and further strengthens after the global financial crisis in 2008 [62].…”

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“…Chang et al (2013) investigated the correlations of oil prices, gold prices and the New Taiwan dollar versus U.S. dollar and concluded that the selected variables remain independent from one another. Coudert & Mignon (2016) also investigated the relationship between oil price and the US dollar and established a negative relationship in most cases, except in the periods when dollar surged to an extremely high level. Rahmanifard et al (2016) performed causality test and co-integration, in order to establish relationship between crude oil prices and US dollar for the period of 1990-2013.…”

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“…The statistical methods cut across cross-correlation, co-integration, vector autoregressive (VAR), error correction mechanism (ECM) (Amano and van Norden (1998) Wang et al (2013)). Other econometric approaches have been considered and deployed by Obadi and Othmanova (2012), Hazarika (2015), Coudert and Mignon (2016), among others.…”