This is a very surprising behavior. It doesn’t respect New link format setting in Obsidian. Obsidian’s current implementation makes sense (to me) only if that setting is set to Absolute path in vault.
Overall this question is debatable. I could not find any mentions of relative paths in Wikipedia Wikilink specification Help:Link - Wikipedia
But I think that is because in Wikipedia they don’t have a concept of folders so essentially all their “notes” reside in the same folder so they never have this problem.
I am curious to know where is your design decision regarding rooted wikilinks came from. Are you trying to be compatible with some other product’s wikilink implementation?
And even if we stop discussing wikilinks, regular markdown links creation doesn’t work as expected
Consider Vault/Folder/MyNote.md
[just link](ChildFolder/LinkedNote.md)
[starting with dot](./ChildFolder/LinkedNote2.md)
[does not work at all](../SiblingFolder/LinkedNote2.md)
by clicking on the first link, the note is created under Vault/ChildFolder/LinkedNote.md instead of Vault/Folder/ChildFolder/LinkedNote.md as expected
Second link has the same flaw but it even worse because now it is very obvious that the relative link was meant there.
And third link has the same Folder already exists error.
P.S.
I am a software developer myself and I like Obsidian very much. If your team can find any of my development help useful, I am ready to help voluntarily
I understand that links are relative to the root. I just asked what is the reasoning for that. As in HTML all links are relative unless they start with slash. I am curious to see why do you make that design decision