The Correlation Between US Dollar Exchange And Oil Price Volatility

Since the "oil crisis" occurred in the 1970s, oil price affects the economy as an important variable, and have led to attention of academia for the causes of prices fluctuation and its impact on the macro-economics. Scholars have established variety models from different perspectives and try to explain the theory of the causes and mechanism of oil price fluctuations, and aim to predicting its trend in the future. Furthermore, they make an analysis of its influence on economic growth, inflation, unemployment and other affect on macro-economics. This paper's analysis belong the causes and mechanism of oil price fluctuation.As well known, with entering in the 21st century, the international oil price has emerged a new round of sharp fluctuation. New York Mercantile Exchange (NYMEX) WTI crude oil futures price rose from 27.01 dollars a barrel in January 2000 to 134.02 dollars per barrel in June 2008. However, the volatility of oil price is different from the oil price fluctuation during "oil crisis", which is related to certain political events, the main reason is the political tensions between Western countries and major oil producers, raising concerns about lack of oil supply and leading to the rising of oil price. However, in the new century, despite of the "911" events and the Iraq War, the political relations are basically stable between western developed countries, which are main oil consuming countries, and the major oil producers, but oil prices have rose apparently at the same period. Obviously, this round of oil price fluctuation has different factors and formation mechanism with the previous oil crisis. It is essential for us to analyze this economic phenomenon in order to find out regularities.Oil as the world's most important trade commodities, has an important influence on every country's economy, so oil is also known as "industrial blood". Because of the particular role of oil, its price cannot simply discussed with the general supply and demand balance theory of goods, it is not only fluctuate with changes of supply and demand, but also affected by many other uncertainties, such as the U.S. dollar exchange rate, geopolitical incidents, OPEC oil policy, oil stocks and oil futures market speculations. In particular, the price of oil is priced in U.S. dollars in international market, so the movements of U.S. dollar value will inevitably have an impact on oil prices. In the new century, with oil prices rising, the dollar has been weakening, and has a larger depreciation, so huge amounts of dollar assets influx in the international oil market to preserve and increase its value. These assets not only push up international oil price, but also making oil's economy and financial property growing. Contrary, its goods property is less and less. This makes supply and demand have less impact on short-term oil price. In other words, the economic and financial factors play a decisive role in determining short-term oil price.Generally, dollar depreciation will lead to a dollar-denominated commodity's price higher. However, the factors which lead to oil price fluctuation are variety; both supply and demand factors and economic and financial factors are included. Whether U.S. dollar exchange rate factor is the main contributing factor or not to the fluctuation of oil price in this round? And impact how much? These issues haven't been systematically analyzed. This article will reference to the actual data from 2000 to 2009, using econometric models VAR and VEC to analyze relevant factors quantitatively. Then the correlation and its degree between oil price and U.S. dollar exchange rate are given from the quantitative point of view.Since china's oil import is more and more, it is great significant to accurate analyze and forecast oil price movements for China's energy security and economic security, and selecting the timing of the establishment of strategic oil reserves and other strategic issues, This analysis is hoped to make a reference to oil price forecast from the perspective of U.S. dollar exchange rate.The whole paper is divided into five chapters, the structure and main contents are as follows:ChapterⅠIntroduction. As well as literature review; this chapter also introduces the research background, purpose and significance of the study.ChapterⅡOil prices influence factors. Oil as the world's most important Trade Goods, which has the complex mechanism of price changes and is affected by many factors, this chapter generally analyzed factors impact on oil price such as supply and demand, U.S. dollar exchange rate, speculation, psychological expectations, unexpected events,etc.ChapterⅢModeling. This section introduces the techniques used by empirical analysis, including vector autoregressive model VAR, vector error correction model VEC, and the corresponding methods of analysis:impulse response function and variance decomposition.ChapterⅣEmpirical results and their interpretation. This chapter shows the analysis results by use of empirical methods and data of Chapter III, and makes related examination and treatment of the data according to the model requirements.Chapter V Conclusions and directions for further research. This part as the last part of this article, firstly give a comprehensive summary of the article, then point out the disadvantage of the paper and further research directions, hoping to provide ideas and directions for further research.Chapter II, III and IV is the core of this article; in addition, the major innovations of this paper are the following:Firstly, the main factors which impact on international oil price are analyzed comprehensively, and distinguished as commercial property factors and financial property factors.Secondly, the paper clearly set U.S. dollar exchange rate as an important factor that affect oil price, and put together with other factors for comparative analysis.Thirdly, the paper uses actual data of relevant variables to analyze of the affect degree quantitatively and also explicated relevant conclusions.