Pound Risks Becoming Irrelevant as Brexit Dims Reserve Status


#1

bloomberg.com/news/articles/2017-01-25/sterling-risks-becoming-irrelevant-as-brexit-dims-reserve-status

**Pound Risks Becoming Irrelevant as Brexit Dims Reserve Status

The fallout from the U.K.’s vote to exit the European Union includes the risk of the pound losing favor as a place for safe-keeping by global managers and their $11 trillion stockpile of reserves.

“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,” Robin Winkler, a London-based Deutsche Bank AG strategist wrote in a note. “The pound may offer value, but is increasingly irrelevant.”

The pound has depreciated 15 percent since Britain’s June 23 vote to exit the economic bloc, trading at $1.26 Wednesday. It reached $1.1841 on Oct. 7, the lowest since 1985.

The British currency’s share of global reserves has fallen for the last two quarters to 4.5 percent, according to the most recent International Monetary Fund quarterly Composition of Official Foreign Exchange Reserves report – dubbed as COFER data – which runs through Sept. 30. The U.S. dollar holds the largest slice at 63.3 percent, followed by the euro with 20.3 percent…

Hopes for a slow exit have dimmed this month after U.K. Prime Minister Theresa May said that she will publish her plan for negotiations to leave the EU and promised lawmakers a vote on the final exit deal.

The slimming of the pound’s share of reserves may be even worse than the IMF data may signal, given China only recently began to report allocations, added Winkler.**


#2

Prominent economists warned about this.

People were stupid, didn’t listen to fact and reason.


#3

That’s what happens when people think with national-pride instead of their mind.

And we in the former Colonies are about to drive into the same sinkhole.

God help both nations and ICXC NIKA


#4

Amen, God help the English-speaking world indeed!


#5

I wish I took economics in high school or college. I’m such an unwashed peasant.

Why would the USD have such a radically higher share in reserves, since the combined EU (at least prior to Brexit) has a slightly higher GDP than the US? I understand almost nothing whenever I read articles like this.

Then again, maybe 90+% of everybody else is in the same boat and I’m just shameless enough to admit it.


#6

That’s a great question.

I am certainly no economist myself but my understanding is that the Eurozone’s (estimated) GDP was $13 trillion in 2013, compared with U.S. GDP of $16.8 trillion. It was $17.6 trillion for the overall EU (euro and non-euro countries). However it is currently the second largest economy after the U.S. by some estimates and still marginally the largest according to others, such as the UN.

Brexit will knock it down a bit, giving the U.S. a further edge (well, unless something goes very wrong) but the EU will still rank above China in second spot - it will definitely be the second largest economy rather than the first post-Brexit by all estimates.

In that respect, the GDP of the Eurozone itself ranks second in the world to the U.S. but the EU as a whole - Euro and non-Euro - was for a period the world’s largest economy by GDP.

As to why the dollar outstrips the Euro as the overriding reserve currency choice, I would wager that its firstly to do with the age of the two currencies. The dollar has dominated the Foreign Exchange Reserves (COFER) since the 1944 Bretton Woods agreement. The Euro was only introduced to world financial markets in 1999. It needs longer to become established.

Secondly, the Euro took a battering during the sovereign debt crisis following the financial crash of the late 2000s and consequently hasn’t looked to be a “risk-free” alternative to the dollar, which remains the safest bet. The eurozone’s problems demonstrated to international markets that not all European countries could provide financial assets that can be relied on as a store of value for risk-free reserves.

And so the dollar reigns.


#7

Facing the prospect of increasing the national debt by another $10-16 trillion over the next 10 years, the dollar may lose some strength. Let’s just hope Trump doesn’t start negotiating the debt, otherwise the credit rating would tank.


#8

My pension comes in from the UK and since Brexit has been down… Hoping it does not get lower…


#9

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