AN INQUIRY ON THE SECULAR TRENDS IN THE DOLLAR-EURO EXCHANGE RATE, CRUDE OIL PRICING, AND MARKET VALUES

This study examines secular trends in the pricing of the euro and the prospects of the new European currency to compete with the U.S. dollar in denominating international assets. The global importance of crude. oil as the world's largest cash commodity provides a basis to evaluate the short- and long-run dynamics of the value of the euro vis-à-vis crude oil price as well as stock market and interest rate variables. Variance decompositions show that innovations in oil price and U.S. interest rates explain most of the intertemporal variations of the euro. Conversely, the contribution of the euro to oil price volatility is marginal especially after European stock market effects have been accounted. Notwithstanding, a long-run positive trend seems to exist between oil price and euro as evidenced by their impulse response functions.