The effect of the US dollar exchange rate on oil prices: An oil financialization perspective
Corresponding Author
Panpan Wang
School of Economics and Management, Southeast University, Nanjing, China
Correspondence
Panpan Wang, School of Economics and Management, Southeast University, No.2 SEU Road, Nanjing 211189, China.
Email: [email protected]
Search for more papers by this authorXiaoxing Liu
School of Economics and Management, Southeast University, Nanjing, China
Search for more papers by this authorTsungwu Ho
College of Management, National Taiwan Normal University, Taipei, Taiwan
Search for more papers by this authorYishi Li
College of Economics and Management, Zhejiang University of Water Resources and Electric Power, Hangzhou, China
Search for more papers by this authorCorresponding Author
Panpan Wang
School of Economics and Management, Southeast University, Nanjing, China
Correspondence
Panpan Wang, School of Economics and Management, Southeast University, No.2 SEU Road, Nanjing 211189, China.
Email: [email protected]
Search for more papers by this authorXiaoxing Liu
School of Economics and Management, Southeast University, Nanjing, China
Search for more papers by this authorTsungwu Ho
College of Management, National Taiwan Normal University, Taipei, Taiwan
Search for more papers by this authorYishi Li
College of Economics and Management, Zhejiang University of Water Resources and Electric Power, Hangzhou, China
Search for more papers by this authorAbstract
This study investigates the regime-specific relationship between the USD exchange rate and oil prices. We embed the threshold variables of structural breaks and oil financialization into the VAR model of the dollar–oil relationship. Using daily data from 1983 to 2022, we find that a marked structural change in the dollar–oil relation exists in 2001 and that deepening oil financialization drives the structural change, making the portfolio effect the dominant effect of the dollar on oil prices. After 2001, the dollar negatively affects oil prices in both the long and short run. Furthermore, our threshold regression based on the investor self-adaptive expectation model shows that investor expectations significantly affect the dollar–oil relationship under oil financialization. A sharp increase in USD exchange rate volatility would strengthen investors' unilateral expectation of the trend of the USD exchange rate, which further enhances the portfolio effect, resulting in an even stronger negative effect of the dollar on oil prices.
CONFLICT OF INTEREST
The author declares there is no potential conflict of interest.
Open Research
DATA AVAILABILITY STATEMENT
The data that support the findings of this study are available from the corresponding author upon reasonable request.
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