Oil prices and exchange rates dynamic: does de-dollarization matter?

Abstract The use of the US dollars as invoicing currency in international transactions for decades has provided the United States of America with tremendous advantages: an increase in the USD demand alongside with its valuation, as well as the demand in the US treasury which provides the country with unlimited privileges in borrowing. However the recent geopolitical, economic and historical events have prompted many endeavors to diversify away from the US dollars, by the way, challenging the United States hegemony. Against this background, the current research intended to assess the extent to which the de-dollarization is shifting the traditional relationship between the exchange rates returns and the crude oil prices in China and Russia, countries that have taken bold steps regarding the de-dollarization. The researchers applied both the time varying granger causality (TVGC) and the parametric in quantile causality on a two period sample, prior and after 2014 .The study results revealed that, there is strong evidences of causality from crude oil price to the Chinese and Russian exchange rates returns prior to 2014. However, after 2014, not only the causality from international oil prices to exchange rates weakens, but also Chinese and Russian exchange rates returns proved to affect international oil prices, mostly at extreme values of the quantiles. These findings are insightful, unlike the theoretical literature and abundant empirical evidences supporting the impact of USD on crude oil prices, this article revealed that, other currencies, namely the Chinese RMB and the Russian rubble can nowadays influence the international crude oil prices. While the de-dollarization of crude oil markets can be an effective risks diversification strategy for these countries, we nevertheless recommend them to develop sound measures in order to mitigate their currencies volatility. As well, the United States of America should re-evaluate its foreign policy and macroeconomic environment.