Abstract

This chapter surveys existing theoretical and empirical research on the relationship between oil prices and exchange rates. We use a simple empirical application which shows that the correlation between the two variables in level form (return form) is −0.87 (−0.22) and also document a significant ‘news’ and volatility spillover effect across the two series. The general consensus in the literature is that there is bidirectional causality between the two variables. This implies that using one variable for forecasting the other has substantial economic benefit. We discuss important economic implications and list some promising avenues for future research.