A poll by trade journal Central Banking Publications suggests the pound’s status as a global reserve currency is likely to be threatened by Brexit. According to the survey of central bank money managers, the status of sterling will be endangered by Brexit, and the final deal will alter their views about the currency. In the survey, 75 per cent of reserve managers have predicted that central banks will collectively make changes and, in all likelihood, cut their holdings of the pound. The currency has established itself as one of the most critical global currencies and the high liquidity of the asset, which could be sold quickly to help curb swings in their own currency’s exchange rates, has meant central banks have long held assets denominated in pounds.
Central Banking Publications surveyed 80 managers, who work at central banks that hold €7 trillion in assets. More than a third of participants indicated that, as global holdings of sterling will be impacted by Brexit, they would decrease the pound holdings they personally control. Nick Carver, publisher of Central Banking Publications, said that money managers do not usually like volatility and uncertainty, and exiting the EU is identified with both. Whether in terms of changes to back-office and counterparty arrangements, or market movements, managers find Brexit disruptive.
Pound, which has long benefited from its popularity as a reserve currency, could see simultaneous selling pressure from central banks. This could weaken the currency and increase the costs of borrowing for the UK government and companies, though giving a much-needed boost to the export sector.
Until around the middle of the 20th century, the pound was the global reserve currency of choice, before the dollar took its position after the second world war. Reserve currencies are chosen by the central bank from sovereign issuers that boast open financial markets, stability and economic clout. After the US dollar, the euro and the yen, sterling is the fourth most popular reserve currency. The pound has declined to below $1.30 from above $1.45 since the country voted to leave the EU in June 2016.
According to the International Monetary Fund’s data, pound-denominated assets still make up about 4.5 per cent of official reserves. However, since the vote, managers have been waiting for more clarity on the final form of Brexit deal before making a final decision, as evident from data which shows the dollar value of reserves held in sterling assets has remained around the same level since the vote.
Not all reserve managers see a significant drop in sterling holdings, as noted by a manager from one eurozone member state. But the manager acknowledged that Brexit was already creating other complications, as legal work for bank’s risk management has increased because counterparties are moving at least some parts of their business out of London or preparing for this.
According to the poll compiled in February and March, assets emerging market bonds and Yuan are becoming more popular. The survey suggested that environmental factors are increasingly becoming an essential consideration for making decisions on asset allocation. Out of 80 managers surveyed, 35 said they had already changed or were considering altering their asset allocation to avoid companies that violate human rights or cause severe environmental damage.
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