Risk spillover effect of US dollar exchange rate on oil prices

The US dollar is frequently used as the invoicing currency of international crude oil trading. Hence, the fluctuation and risk in US dollar exchange rate is believed to underlie the volatility of crude oil price and especially risk transmission to its market. When the prospect of the US dollar is not considered promising, a large amount of money will flow to the oil market, thus oil price will be driven up. As a result, some new investment and speculation opportunities can be derived for traders. For existence such relationship, controlling and monitoring the financial risk between these two markets is necessary. This paper applied new risk management tool, VaR methodology, and Granger causality test in risk to examine the risk spillover effect in both crude oil market and US dollar exchange market. Results show that, from the perspective of market risk, interaction between crude oil market and US dollar exchange rate does not seem strong. So the effect of extreme risk spillover between two markets proves quite limited.