Geopolitical Proximity and the Use of Global Currencies

After decades of increasing global economic integration, the world is facing a growing risk of geoeconomic fragmentation, with potentially far-reaching implications for the global economy and the international monetary system. Against this background, 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, our analysis confirms the importance of inertia, trade and financial linkages in shaping the currency landscape, consistent with existing studies. On geopolitical proximity, we find that closer 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.