The evaluation of the USD currency and the oil prices : a Var analysis

Abstract

Dollar devaluation creates a huge problem in the world oil industry, leading to a vast decrease in the revenues of the oil producers, though the local oil producers use the local currencies to operate and the oil price is evaluated in dollars. The depreciation of the US dollar reduces the effect of the high prices in oil, making it rather cheap for all the countries and especially for the Eurozone area. The record high exchange rate of the Euro vis-à-vis dollar followed by a subsequent high of the crude oil price, suggests on a relation between the price of the oil and the evaluation of the US dollar. The main aim of this research is to construct an restricted Vector Autoregressive estimation model to simulate the relation between the exchange rate of the U.S. dollar and Euro against the West Texas Intermediate (WTI) prices for light crude oil, in connection with the impulse response of the prices to the various shocks. Lastly, a co integration test will illuminate the possibility of simultaneous long term integration along with Granger causality test to estimate the direction of causality in variables.