Sterling’s reserve status set to diminish post-Brexit, claims Deutsche Bank

Karen Gilchrist, Digital Reporter

The will become "increasingly irrelevant" as a global reserve currency once the U.K. leaves the EU, new research from Deutsche Bank has claimed.

This could be harmful for the U.K. which relies on a strong reserve status, and the resultant capital inflows, to help pay down its current account deficit.

According to the study, sterling's role in the IMF'S currency composition of official foreign exchange reserves (COFER) has fallen in recent months and is set to diminish further as Britain's role in the global economy weakens outside of the EU.

Demonstrators take part in a protest aimed at showing London's solidarity with the European Union following the recent EU referendum, inTrafalgar Square, central London, Britain June 28, 2016.
Dylan Martinez | Reuters

While official data is yet to be released, the bank claims that sterling's value as a currency bloc has likely halved since early 2015, from approximately 15 percent to below 10 percent, and is largely indicative of the direction of travel for IMF COFER shares.

The report claims that sterling COFER shares currently stand at 5 percent, versus 20 percent for EUR and 63 percent for USD.

This erosion is set to intensify, the bank claims, with China's recent emergence as an official world reserve currency in 2015.

Official data on China's currency reserves is only available from 2015, but Deutsche Bank claims this may mask a "drastic slimming in their former overweight pound."

The bank claims that sterling as a share of China's overall currency allocation has "likely fallen from close to 10 percent (in 2002-2014) into low single digits since early 2015."

In a research note, Deutsche Bank analyst Robin Winkler commented: "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."

Foreign investors have demonstrated increased interest in the UK gilt market as they seek to take advantage of sterling's depreciation since Britain's vote to leave the EU. However, based on the new study, Deutsche bank warned: "the pound may offer value but is increasingly irrelevant."

In the wake of the result sterling tumbled, eventually hitting a 31-year low against the dollar at $1.28.

In more recent days, volatility has seen sterling trading around $1.25 to $1.26 as and .

The British pound, which has fallen more than 15 percent since the U.K.'s vote to leave the EU, was once the world's chief reserve currency, accounting for approximately 60 percent of world trading.