External conflict and currency competition in a globalised world

The increasingly hostile international environment is putting a strain on global trade and financial balances, suggesting that there may be a reason other than geopolitical interests behind the growth of conflicts around the world. This article aims to explore how external conflicts can affect the global weight of a nation’s economy and contribute to its positioning in the globalised context. To reach this objective we connect the exchange rate with the special drawing rights (SDRs) of five main international currencies – namely the US dollar, the euro, the UK pound, the Japanese yen and the Chinese renminbi – with the Indicator of External Conflict developed by the Institute of Economics & Peace. Through a panel dynamic cointegrating technique (Pooled Mean Group estimator) for the time span 2008–23, we find that the higher the index of conflict, the higher the weight and the appreciation of each currency in respect to the SDRs, suggesting therefore that wars play a role in favouring each country’s exchange rate and terms of trade. These results appear to be reinforced by the introduction of further explanatory variables capturing the degree of general, financial and trade globalisation. In a context in which there are no mediating powers or credible supranational institutions equipped with effective tools to ensure sound global governance, conflicts are destined not only to continue, but unfortunately also to spread until either an undisputed dominance of a global currency emerges, or a division of the world in ‘balanced’ spheres of influence is settled.