War and exchange rate valuation

Abstract

This article investigates the extent to which the dominance of the United States dollar as an international currency has been contingent on American diplomacy rather than the prosecution of expensive wars. Four wars are examined, the Korean war (1950-1953), the Vietnam war (1964-1975), the Persian Gulf war (1990-1991), and the Iraq war (2003-present). The historical performance of the dollar is examined in times of war and peace, and the Box-Jenkins forecasting algorithm is employed to make a short-term projection of the dollar coinciding with the Iraq war. The price of gold is used as a measure of the value of the U.S. dollar and investor confidence in the dollar during times of war and peace. The empirical evidence shows a short-term depreciation of the U.S. dollar coinciding with the Iraq war, which is not atypical of the value of the U.S. dollar in a time of war. Problems with the value of the U.S. dollar in times of war lead to the exploration of alternative forms of money, which if very successful, can erode the continued dominance of the U.S. dollar as an international currency.