Sterling’s global currency status faces Brexit acid test
(30 April 2019 – United Kingdom) The delayed Brexit decision is likely to threaten the pound’s status as a global reserve currency according to a survey of central bank money managers.
They comment that Britain’s departure from the EU will alter their views on sterling. The pound’s history as one of the most important global currencies has meant central banks have long held assets denominated in pounds that can be sold quickly to help curb swings in their own currency’s exchange rates. But a poll compiled by Central Banking Publications in February and March of 80 managers working at central banks that hold €7tn in assets suggests its status will be endangered by Brexit, with three out of four reserve managers predicting that central banks will collectively alter sterling holdings, in all likelihood representing a cut. The UK was granted an extension by the rest of the EU earlier this month that enables Brexit to be delayed until October 31.
More than one-third of money managers polled indicated they would reduce sterling holdings. A central bank exodus from sterling would cause a further depreciation in the currency and raise borrowing costs for the UK government. The pound was a key global reserve currency until the 1950s when it was replaced by the US dollar. Central banks choose reserve currencies from sovereign issuers that boast economic clout, stability and open financial markets. Sterling is the fourth most popular reserve currency after the US dollar, the Euro and the Yen. Since the UK voted to leave the EU in June 2016, the pound has fallen from above $1.45 to below $1.30. A reserve manager from one eurozone member state played down the likelihood of a big drop in sterling holdings, but said Brexit was already creating other complications. Assets denominated in Chinese Renminbi (RMB) and emerging market bonds are becoming more popular, according to the poll,
“It’s clear that reserve managers think global holdings of sterling will be impacted by Brexit. Quitting the EU is identified with uncertainty and volatility, which reserve managers tend not to like. They find Brexit disruptive, whether in terms of market movements, or changes to back-office and counterparty arrangements. We are affected by many of our counterparties moving at least some parts of their business out of London or preparing for this, so this has generated a lot of legal work for our risk management” said Central Banking Publications publisher Nick Carver.
Subscribe