Is Pound in danger of losing its reserve currency

Not only the pound had to fall to its lowest level in decades since the Brexit but also now it is at a risk of losing its “Reserve Currency” status too. A London-based strategist at Deutsche Bank, Robin Winkler states that sterling’s status may be sliding.

“To the extent that reserves serve as backstops against currency stress, rather than as sovereign wealth, the pound’s diminishing role in international capital flows post-Brexit should permanently reduce its reserve status,” he wrote in a recent note.

“The pound may offer value, but is increasingly irrelevant.”

What is a reserve currency?

The internationally used national currencies that central banks and governments around the world buy and hold as official “reserves” along with other assets such as gold is called as a reserve currency. (Ex US dollars, euro, and pound sterling)

The reason for them to maintain reserve currency is to manage their own currencies in times of stress, by selling the reserves at certain times and buying them at others.

The US dollar plays a vital role in the world trade, so the dollar is the world’s most-used reserve currency, at around 63 per cent of the total reserved currency is in US dollar. Around 20 per cent of the total reserved currency is in euros. Then, comes the pound sterling at 4.5 percent, roughly equal to the Japanese Yen.

According to IMF Data, “the equivalent of $350bn of reserves is held around the world in sterling.”

What’s the benefit of losing reserve currency?

On the global financial markets, there is always a high demand for a reserve currency. (Though the traded value of the currency can go up and down in a short span wildly as we have noticed with the pound in recent months). And to earn the currency means buying a government’s sovereign bonds. This means the country that has a reserve currency will generally have lower interest rates than they otherwise would. 

Is this really likely to happen?

Everything depends on the decisions central banks around the world make.

The sterling share of global reserves has fallen slightly in the two-quarters to September. (Cited data from the IMF)

The Chinese central bank is also moving out of sterling more rapidly than it moves out of other currencies, as it sells down its massive hoard of reserves in order to stop the value of the renminbi (RMB China’s currency) from falling too fast.

According to this, the actual truth is that it is far too early to predict, everything depends on what kind of trade deal UK will conclude with the EU and what other deals we may strike with other countries.