Brexit threatens the international currency status of the British pound

Posted by qianjiu on May 8th, 2019

The pound is the main international reserve currency, and its position in the global foreign exchange reserves is second only to the dollar, the euro and the yen. The twists and turns of Brexit are shaking the international community’s confidence in the pound and jeopardizing its status as the main international reserve currency.

A recent survey of senior industry executives in the UK industry journal Central Banking magazine found that three-quarters of bank managers predict that they will reduce their holdings on the pound. The survey covered 80 bank executives, whose central bank holds 7 trillion euros of assets. The fact that central bank executives are so bearish on the pounds is bound to weaken the position of the pound in the international money market and significantly increase the borrowing costs of the British government in the international market.

Since the middle of the last century, the pound has been the main international reserve currency. This means that central banks can stabilize their domestic currency exchange rates by selling or buying pounds quickly. Statistics from the International Monetary Fund show that the current share of sterling assets in global official reserves is 4.5%.

The British government has long benefited from this currency status of the pound. Britain's huge current account deficit ranks first in the world, relying on hundreds of billions of pounds of capital inflows each year to break even and make up for this gap. Bank of England Governor Carney has intensively invested in a large amount of British pound capital, which is called "the kindness of strangers." Since 2000, central banks have accumulated an average of billion in additional pounds per year, which has filled at least a quarter of the UK's capital deficit.

But the uncertainty brought about by Brexit is quietly changing all of this. Industry analysts believe that the turmoil triggered by the Brexit is not willing to see bank reserve managers. "The Central Banking Magazine" issuer Nick Carver analyzed that "the bank reserve manager believes that Brexit is destructive to market transactions and back-office management."

In fact, Brexit is changing the fate of the British economy. According to the latest data released by the National Bureau of Statistics of the United Kingdom, the growth rate of the UK economy last year was only 1.4%, which is the worst performance since 2012. Reuters analysts pointed out that the UK's economic growth has slowed down, and the manufacturing industries such as automobiles and steel have shown signs of weakness, and the construction industry has also performed poorly. International accounting firm PricewaterhouseCoopers believes that the UK's economic growth rate is expected to be 1.6% in 2019, slipping from the world's fifth largest economy to the seventh largest economy. For the country's economic prospects, the British Chamber of Commerce's forecast is more "pessimistic", that the UK's economic growth is expected to slow down to 1.3% this year, while the business investment growth rate is only 0.1%, far lower than the previous 1.2% expectation . HSBC issued a report saying that Brexit reduced the UK economy by 1.5%.

The impact of Brexit on the UK economy has shaken the confidence of international rating agencies. Standard & Poor's has already deprived the UK of the "AAA" sovereign credit rating. After Fitch downgraded the UK rating from “AA+” to “AA”, it has maintained a “negative outlook” for four consecutive years. To make matters worse, Fitch recently said that the UK's credit rating will be “re-adjusted again”.

The economy is weak, and the pound as the British currency is naturally hard to firm. HSBC, UBS and other financial institutions have issued reports that the Brexit will cause the pound to depreciate. BlackRock, the world's largest asset management company, even said that the UK may have a "sterling crisis" out of the EU. In the context of Brexit, the cessation of UK trade in goods and services and the slowdown in overseas direct investment are bearish for the pound. In fact, since the Brexit referendum in 2016, the exchange rate of the British pound against the US dollar has fallen from 1.45 to below 1.30. The market's biggest concern is that a sharp fall in the pound may undermine the confidence of international investors in British companies and their assets in some cases.

Now, with the volatility of central bank executives' confidence in the pound, even a slight decline in the share of the pound against the pounds may have a considerable impact on the UK's fiscal position. The deterioration of the UK's fiscal situation will further affect the overall performance of the UK economy, increase the downward pressure on the pound, and ultimately damage the position of the pound's global reserve currency.

(Economic Daily reporter: Xu Huixi Editor: Hu Dawen) The British pound is the main international reserve currency, and its position in the global foreign exchange reserves is second only to the US dollar, the euro and the Japanese yen. The twists and turns of Brexit are shaking the international community’s confidence in the pound and jeopardizing its status as the main international reserve currency.

A recent survey of senior industry executives in the UK industry journal Central Banking magazine found that three-quarters of bank managers predict that they will reduce their holdings on the pound. The survey covered 80 bank executives, whose central bank holds 7 trillion euros of assets. The fact that central bank executives are so bearish on the pounds is bound to weaken the position of the pound in the international money market and significantly increase the borrowing costs of the British government in the international market.

Since the middle of the last century, the pound has been the main international reserve currency. This means that central banks can stabilize their domestic currency exchange rates by selling or buying pounds quickly. Statistics from the International Monetary Fund show that the current share of sterling assets in global official reserves is 4.5%.

The British government has long benefited from this currency status of the pound. Britain's huge current account deficit ranks first in the world, relying on hundreds of billions of pounds of capital inflows each year to break even and make up for this gap. Bank of England Governor Carney has intensively invested in a large amount of British pound capital, which is called "the kindness of strangers." Since 2000, central banks have accumulated an average of billion in additional pounds per year, which has filled at least a quarter of the UK's capital deficit.

But the uncertainty brought about by Brexit is quietly changing all of this. Industry analysts believe that the turmoil triggered by the Brexit is not willing to see bank reserve managers. "The Central Banking Magazine" issuer Nick Carver analyzed that "the bank reserve manager believes that Brexit is destructive to market transactions and back-office management."

In fact, Brexit is changing the fate of the British economy. According to the latest data released by the National Bureau of Statistics of the United Kingdom, the growth rate of the UK economy last year was only 1.4%, which is the worst performance since 2012. Reuters analysts pointed out that the UK's economic growth has slowed down, and the manufacturing industries such as automobiles and steel have shown signs of weakness, and the construction industry has also performed poorly. International accounting firm PricewaterhouseCoopers believes that the UK's economic growth rate is expected to be 1.6% in 2019, slipping from the world's fifth largest economy to the seventh largest economy. For the country's economic prospects, the British Chamber of Commerce's forecast is more "pessimistic", that the UK's economic growth is expected to slow down to 1.3% this year, while the business investment growth rate is only 0.1%, far lower than the previous 1.2% expectation . HSBC issued a report saying that Brexit reduced the UK economy by 1.5%.

The impact of Brexit on the UK economy has shaken the confidence of international rating agencies. Standard & Poor's has already deprived the UK of the "AAA" sovereign credit rating. After Fitch downgraded the UK rating from “AA+” to “AA”, it has maintained a “negative outlook” for four consecutive years. To make matters worse, Fitch recently said that the UK's credit rating will be “re-adjusted again”.

The economy is weak, and the pound as the British currency is naturally hard to firm. HSBC, UBS and other financial institutions have issued reports that the Brexit will cause the pound to depreciate. BlackRock, the world's largest asset management company, even said that the UK may have a "sterling crisis" out of the EU. In the context of Brexit, the cessation of UK trade in goods and services and the slowdown in overseas direct investment are bearish for the pound. In fact, since the Brexit referendum in 2016, the exchange rate of the British pound against the US dollar has fallen from 1.45 to below 1.30. The market's biggest concern is that a sharp fall in the pound may undermine the confidence of international investors in British companies and their assets in some cases.

Now, with the volatility of central bank executives' confidence in the pound, even a slight decline in the share of the pound against the pounds may have a considerable impact on the UK's fiscal position. The deterioration of the UK's fiscal situation will further affect the overall performance of the UK economy, increase the downward pressure on the pound, and ultimately damage the position of the pound's global reserve currency.

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