When oil uncertainty shapes currencies: evidence from low- and middle-income economies

Low- and middle-income countries remain highly vulnerable to commodity shocks, as dependence on resource revenues and energy imports often translates into exchange rate fragility. While prior research has highlighted the impact of oil prices on exchange rates in advanced and large emerging economies, evidence for low- and middle-income currencies is limited, and the role of uncertainty remains largely unexplored. Unlike price changes, oil price uncertainty captures the unpredictability of future outcomes and influences exchange rates through expectations, investment under the real-options channel, and portfolio rebalancing in increasingly financialized markets. This paper investigates whether oil price uncertainty Granger causes exchange rate volatility in low- and middle-income economies between 2007 and 2025. Results reveal heterogeneous and state-dependent effects as significant causal linkages are found for both exporters and importers, while heavily managed regimes show weak or absent connections. Importantly, causality intensifies during global crises, such as the 2008–2009 financial turmoil, the 2014–2016 oil price collapse, and the COVID-19 pandemic.