A wavelet decomposition approach to crude oil price and exchange rate dependence

This paper studies the relationship between oil prices and US dollar exchange rates using wavelet multi-resolution analysis. We characterized the oil price-exchange rate relationship for different timescales in an attempt to disentangle the possible existence of contagion and interdependence during the global financial crisis and analyze possible lead and lag effects. For crude oil prices and a range of currencies, we show that oil prices and exchange rates were not dependent in the pre-crisis period; however, we did find evidence of contagion and negative dependence after the onset of the crisis. Additionally, we found that oil prices led exchange rates and vice versa in the crisis period but not in the pre-crisis period. These findings have important implications for risk management, monetary policies to control oil inflationary pressures and fiscal policy in oil-exporting countries.

► Oil prices and US dollar dependence is analyzed using wavelet multi-resolution analysis. ► At different scales, oil and exchange rates were weakly dependent before the crisis ► There was contagion and negative dependence after the onset of the crisis ► Oil led exchange rates and vice versa in the crisis period but not in the pre-crisis