The US Dollar and Covered Interest Rate Parity Deviations : Oil Price Channel

In this paper, I analyze covered interest rate parity (CIP) deviations among thirteen (13) Emerging Market economies and the US dollar. Also, I document a new triangular connection formed by the US dollar, oil prices in US dollars, and CIP deviations. I find empirical evidence that a stronger dollar both enlarges CIP deviations and depresses oil prices, and that this decline in oil prices explains some of the contractions in dollar supply that lower dollar availability or worsen dollar scarcity in the cross-currency swap markets. Underpinning this triangular relationship is the role of oil price as a major source of US dollar liquidity for oil exporting entities, who are also major suppliers of dollar liquidity to the swap markets to take a position in the global fixed-income market and hedge their FX risk exposure