The quotations show a sharply divergent pattern in the response of the foreign exchange market to announcements of oil price increases. During the first oil shock, news about oil price rises led to a strengthening of the dollar, whereas during the I979 surge of oil prices the reverse was generally true. When the news was not so bad as feared the dollar fell back in I974, but rose in I979. In 1980 the pattern shifted once again, back to dollar appreciation. Is there a rational fundamental explanation for the behaviour of the foreign exchange market, or is it a matter of traders responding to what other traders arbitrarily think? It is difficult to resolve this question, but some insight can be provided through an analytical examination of the relationship between oil price increases and exchange rates. The paper begins with a theoretical framework for analysing the relation between oil prices and exchange rates, and then uses the theory to explain the behaviour of the foreign exchange market.