This study examines the dynamic relationships between energy and foreign exchange markets, with a focus on returns and volatility spillovers across developed and emerging market currencies. Recognizing energy commodities as central to global trade and currencies as indicators of macroeconomic stability, we examine how shocks in one market propagate to others. Using a Time-Varying Parameter VAR (TVP-VAR) model on daily data from 2014 to 2024 for four major energy benchmarks (WTI, Brent, Dutch TTF, Henry Hub) and twelve key currency pairs, we find strong and asymmetric spillovers in both returns and volatility. Emerging market currencies, such as the Polish zloty and Czech koruna, primarily transmit volatility, while WTI and Brent act as major shock sources in energy markets; natural gas benchmarks mainly absorb volatility. Return spillovers are typically short-lived, whereas volatility linkages persist and intensify during crises, notably during the COVID-19 pandemic. These findings highlight distinct return- and volatility-driven contagion channels, offering valuable insights for investors, policymakers, and risk managers in an interconnected financial landscape. • Emerging market currencies act as key volatility transmitters, while natural gas benchmarks primarily absorb shocks. • Return spillovers are short-lived, whereas volatility transmissions are more persistent and intensify during periods of crisis. • Notably, the Czech koruna, Polish zloty, and Hungarian forint exhibit substantial spillover effects across all periods examined. • Spillover builds up between 1 and 2 days, while systemic risk develops between 2 and 5 days.
Karkowska et al. (Sun,) studied this question.