Once the world's
reserve currency, the British Pound has steadily fallen in significance
as a currency used to finance international trade and fill central bank
It appears that the trend has accelerated of late.
New research shows Sterling has seen a rapid loss stature amongst the
world’s reserve currencies thanks to its notable dive in value since
the EU referendum.
And, according to the research conducted by Deutsche Bank, Pound Sterling might not be able to regain lost status.
Central banks stock currencies to which their own currencies are most susceptible via trade and capital flows.
Academic work shows that global reserve allocations closely match the relative sizes of the major currency blocs.
“These are calculated as the betas of each global currency to the
reserve currencies—USD, EUR, and GBP—multiplied by the relative sizes of
the respective economies,” notes Winkler.
This model currently allocates 47% to the dollar.
“Combined with America’s 16% share in the global economy, this
exactly matches the Dollar’s 63% share in COFER reserves,” says Winkler.
“Despite the Dollar's decline and the shrinking share of the
US economy, the Dollar zone still accounts for more than half of the
global economy. In countries whose currencies are more stable against
the Dollar than against the Euro, a reserve composition that favours the
Dollar produces more stable returns in terms of the domestic currency.”
- Bank for International Settlements on the Dollar zone.
For the Euro, the model is equally precise in predicting the 20% COFER share.
For Sterling, the 6% share is close to the 5% COFER share.
Bank for International Settlements research suggests that currency movements drive reserve currency compositions at global reserve banks.
Therefore, the ~11.73% decline in the GBP/USD exchange rate over the
course of the last year will certainly explain the Pound’s diminished
stature as a global reserve currency.