As one of the very few reserve currencies in the world, Britain’s Sterling pound is considered to be one of the most popular reserve currencies held by many central banks. Historically, Sterling is the third most widely held currency, after US dollar and Euro. Thus, one cannot ignore the devastating effect of Brexit on Sterling pound when it recently plummeted to historic low. Currently, Sterling is trading at a 31-year low and this led to a lot of fear in the market.
The current turmoil stems from the massive drop in the Sterling pound which wiped off billions from the markets. Governments which hold Sterling pound as foreign currency reserves suffer huge losses. Many investors fled for safety and bought into Japanese yen, causing the yen to rise substantially. The upward swing results in Japanese exports becoming expensive overnight and potentially worsen the deflation condition in Japan economy.
The havoc in the currency markets may prompt central banks to take drastic actions before the situation manifests into global crisis of confidence. Some of the possible measures may include further interest rate cuts, stimulus packages to encourage spending or even negative interest rates, which Japan and several European countries have recently implemented. Central banks may likely to also increase their gold holdings to mitigate the losses from the Sterling devaluation.
The intervention risks arising from monetary policies would have significant consequences for the man in the street because these actions often led to inflation or deflation. Inevitably, the value of their currencies will diminish and thus those who hold their wealth in fiat currencies would see their purchasing power drop. In the face of uncertainties arising from Brexit, investors do not have many alternative safe assets to preserve their wealth.
Gold as safe haven
Gold is seen as a …Read more