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The multilateral relationship between oil and G10 currencies

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  • Kunkler, Michael
  • MacDonald, Ronald

Abstract

The relationship between oil and currencies is expected to be multilateral in nature. However, the use of the US dollar price of oil to measure this relationship can suffer from aggregation bias, which is caused by the well-known numéraire effect: the quotation of oil in US dollars. In this paper, we remove the numéraire effect from the US dollar price of oil by creating a global (multilateral) price of oil, which is quoted relative to multiple currencies. This allows us to estimate an unbiased multilateral relationship between oil and G10 currencies. We find that the global price of oil moves multilaterally with a group of “oil” currencies: the Norwegian krone, the Australian dollar, the Canadian dollar and the British pound. In contrast, the Japanese Yen and the Swiss Franc move multilaterally against the group of oil currencies and not against the global price of oil.

Suggested Citation

  • Kunkler, Michael & MacDonald, Ronald, 2019. "The multilateral relationship between oil and G10 currencies," Energy Economics, Elsevier, vol. 78(C), pages 444-453.
    • Handle: RePEc:eee:eneeco:v:78:y:2019:i:c:p:444-453
    DOI: 10.1016/j.eneco.2018.11.026
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    Cited by:

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    2. Toan Luu Duc Huynh & Muhammad Shahbaz & Muhammad Ali Nasir & Subhan Ullah, 2022. "Financial modelling, risk management of energy instruments and the role of cryptocurrencies," Annals of Operations Research, Springer, vol. 313(1), pages 47-75, June.
    3. Wen, Danyan & Liu, Li & Ma, Chaoqun & Wang, Yudong, 2020. "Extreme risk spillovers between crude oil prices and the U.S. exchange rate: Evidence from oil-exporting and oil-importing countries," Energy, Elsevier, vol. 212(C).
    4. Lei Ming & Yao Shen & Shenggang Yang & Minyi Dong, 2022. "Contagion or flight‐to‐quality? The linkage between oil price and the US dollar based on the local Gaussian approach," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 42(4), pages 722-750, April.
    5. Das, Debojyoti & Maitra, Debasish & Dutta, Anupam & Basu, Sankarshan, 2022. "Financial stress and crude oil implied volatility: New evidence from continuous wavelet transformation framework," Energy Economics, Elsevier, vol. 115(C).
    6. Ming, Lei & Yang, Ping & Tian, Xinyi & Yang, Shenggang & Dong, Minyi, 2023. "Safe haven for crude oil: Gold or currencies?," Finance Research Letters, Elsevier, vol. 54(C).

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    More about this item

    Keywords

    Oil; Exchange rates; Numéraire effect;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • Q40 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - General

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