Relationship between oil prices and exchange rates

Abstract

The aim of this study is to understand the relationship between oil prices and nominal exchange rates and how the fluctuations in oil prices can impact the exchange rates of an economy. Existing studies have largely focused on monthly and quarterly frequency of the data to keep a track of oil prices and subsequently check for the impact on exchange rates. Our aim of the paper is to substantiate the growing concern that monthly and quarterly frequency of data fluctuation is not sufficient to form the basis for prediction of exchange rates. In addition, we aim to establish that daily fluctuation of oil prices is a much better measure to predict exchange rates and form a strong relationship between oil prices and exchange rate.