Brexit threatens pound's status as global currency, surveys says

Central bank reserve managers signal reluctance to hold sterling after UK leaves EU. Photo / Getty Images

Brexit is likely to threaten the pound's status as a global reserve currency according to a survey of central bank money managers who say 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 by Central Banking Publications, a trade journal, suggests its status will be endangered by Brexit, with three-quarters of reserve managers predicting that central banks will collectively alter — and in all likelihood cut — their sterling holdings.

More than one-third of 80 people surveyed — managers working at central banks that hold €7tn in assets — indicated that they would reduce the sterling holdings they personally control.

A central bank exodus from sterling would weaken the currency and raise borrowing costs for the UK government, which has long benefited from the pound's popularity as a reserve currency.

"It's clear that reserve managers think global holdings of sterling will be impacted by Brexit," said Nick Carver, publisher of Central Banking Publications.

"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."

The pound was the global reserve currency of choice until around the middle of the 20th century, when it was superseded by the dollar.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.

Assets denominated in the pound still make up about 4.5 per cent of official reserves, according to International Monetary Fund data. The data show the dollar value of reserves held in sterling assets has remained around the same level since the vote, suggesting reserve managers are waiting to know the terms of any deal before making a final decision.

The UK was granted an extension by the rest of the EU earlier this month that enables Brexit to be delayed until October 31.

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.

"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."

Assets denominated in renminbi and emerging market bonds are becoming more popular, according to the poll, compiled by Central Banking Publications in February and March,

The survey also suggested that central banks were increasingly making decisions on asset allocation based on environmental factors.

Thirty five of the respondents said they were either considering changing, or had already changed, what they were investing in to avoid companies that cause severe environmental damage or violate human rights.

Written by: Claire Jones

© Financial Times