Analysis Shows Pound Sterling ‘Increasingly Irrelevant’ as Global Reserve Currency

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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 coffers.

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.

Pound Sees Diminishing Stature

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.


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