This paper investigates the dynamic relationship between the trade-weighted dollar exchange rates and the oil prices in the world market. Monthly data during 1980–2017 are used for this purpose.
The symmetric and asymmetric generalized impulse response functions are estimated for these important economic indicators.
The empirical findings show that if the dollar rate increases (i.e. the dollar depreciates), the oil price will increase. The reverse relationship is also supported empirically meaning that an increase in the oil price will results in a significant depreciation of the dollar rate. Based on the asymmetric impulses responses, it can also be claimed that the negative interaction is only significant for the positive changes and not for the negative ones. Thus, the underlying variables are negatively interrelated only for the positive shocks since a negative shock from any variable does not seem to have any significant impact on the other variable. These results have implications for cross hedging of price risk.
To the best knowledge, this is the first attempt to investigate the relationship between the dollar weighted exchange rate and the oil pieces via the asymmetric impulse response functions. Both of these variables and their interactions are very important for investors as well as policy makers worldwide.
The authors would like to thank the editor of this journal and the anonymous referee for valuable comments that resulted in improving the paper significantly. However, the usual disclaimer applies. Funding: This work was supported by the United Arab Emirates University Research Office via the United Arab Emirates University [UPAR Grant No. 31S369].
Hatemi-J, A. and El-Khatib, Y. (2020), "The nexus of trade-weighted dollar rates and the oil prices: an asymmetric approach", Journal of Economic Studies, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/JES-06-2019-0266Download as .RIS
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