## Geopolitical Proximity and the Use of Global Currencies

_IMF Working Papers, September 6, 2024_

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**Canonical URL:** [Geopolitical Proximity and the Use of Global Currencies](https://www.imf.org/en/publications/wp/issues/2024/09/06/geopolitical-alignment-and-the-use-of-global-currencies-554242)

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## Bibliographic details
- Authors: Jakree Koosakul, Longmei Zhang, Maryam Zia
- Published: September 6, 2024
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9798400287763.001

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### Summary
- After decades of increasing global economic integration, the world faces a growing risk of geoeconomic fragmentation with potentially far-reaching implications for the global economy and the international monetary system.
- This paper studies how geopolitical proximity, along with other economic factors, affects the usage of five SDR currencies in cross-border transactions.
- Since World War II, the global currency landscape has remained relatively stable, with the U.S. dollar serving as the dominant currency.
- Using country-level SWIFT transaction data, the analysis confirms the importance of inertia, trade and financial linkages in shaping the currency landscape.
- Closer geopolitical proximity can boost the use of the euro and renminbi, notably among emerging market and developing economies, although the impact is rather muted in the full sample.
- The effect on RMB usage in the full sample is more pronounced during periods of heightened trade policy uncertainty.
- These findings suggest that in a more geoeconomically fragmented world, alternative currencies could play a greater role.

### Key Findings
- Currency dominance since World War II:
  - The U.S. dollar remains the dominant global currency.
- Determinants of currency usage identified:
  - Inertia (past usage patterns) is an important determinant.
  - Trade linkages shape currency choice.
  - Financial linkages shape currency choice.
- Geopolitical proximity effects:
  - Closer geopolitical proximity is associated with increased use of the euro and renminbi.
  - The increase is notable among emerging market and developing economies.
  - In the full sample, the effect of geopolitical proximity is rather muted.
  - For the renminbi (RMB), the usage effect in the full sample is stronger during periods of heightened trade policy uncertainty.

### Data and Methodology
- Data source:
  - Country-level SWIFT transaction data are used to analyze currency usage in cross-border transactions.
- Currencies analyzed:
  - Five SDR currencies (implicitly the SDR basket) are examined for usage patterns.

### Implications and Interpretation
- Geoeconomic fragmentation risk:
  - A shift toward greater geoeconomic fragmentation could alter the international monetary system and cross-border currency usage patterns.
- Role of alternative currencies:
  - The euro and renminbi could play a greater role in cross-border transactions if geopolitical alignment strengthens or fragmentation increases.
- Interaction with trade policy uncertainty:
  - Heightened trade policy uncertainty amplifies the effect of geopolitical proximity on RMB usage in the full sample, suggesting that policy uncertainty can accelerate currency shifts linked to geopolitical alignment.

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_Source: https://www.imf.org/en/publications/wp/issues/2024/09/06/geopolitical-alignment-and-the-use-of-global-currencies-554242_