Pound sterling could lose its reserve currency status as Brexit hardens, Standard & Poor’s warns

Standard & Poor’s stripped Britain of its AAA status immediately after the Brexit vote in June

The pound might fall out of the International Monetary Fund’s elite basket of reserve currencies if the UK fails to secure full access to the single market as it prepares to negotiate its way out of the EU, US rating agency Standard & Poor’s has warned.

Standard & Poor’s stripped Britain of its AAA status immediately after the Brexit vote in June, saying the leave result would "weaken the predictability, stability, and effectiveness of policymaking in the UK".

Ravi Bhatia, S&P’s director of sovereign ratings for Britain, said a “hard Brexit” settlement could jeorpardise sterling position as an international reserve currency.

He told the Telegraph: “To be a reserve currency means that the world has trust in you and is happy to hold its savings in your currency. It creates a pool of available capital. If you lose this and sterling becomes just another currency, a key advantage is lost.”

Bhatia also suggested the Government appeared insouciant about the consequences of a so called hard Brexit.

“There seems to be this view that ‘we’re a big important economy, the Europeans export a lot to us, so they have got to give us what we want’, but is that really true?”

“Individually most of these countries don’t export that much to the UK, and were seeing a hardening of attitudes,” he said.

S&P’s warning came as the pound fell below $1.22 against the dollar in early trading on Friday pushed down by comments from the President of the European Council Donald Tusk and the French finance minister Michel Sapin.

Tusk said Britain's only real alternative to a "hard Brexit" is "no Brexit" on Wednesday.

He said there could be "no compromises" on retaining benefits such as access to the single market and customs union, while rejecting the free movement of people

Meanwhile, Sapin said that some US banks are already looking to move their operations out of London in favour of the continent.

It recovered slightly from its losses hoverinf around $1.22 at noon.

Connor Campbell, financial analyst at Spreadex said: "Unsurprisingly this kind of rhetoric hasn’t been welcomed by the pound, which has fallen half a percent against the dollar and 0.1 per cent against the euro," he said.

"While this keeps sterling above the week’s - and, indeed, decades’ - lows, that fact will provide mere crumbs of comfort for the currency," he added.

Sterling is close to a historic new low on a ‘trade-weighted basis’, as global markets assess Britain’s prospects out of the EU.

Against the dollar sterling remains more than 17 per cent lower than on 23 June.

Bank of England policymaker Michael Saunders said on Tuesday he would not be surprised if the pound fell further.

Michael Hewson of CMC Markets said that trying to find a natural level for sterling is going to be difficult in the short term.

Hewson said: “Due to the amount of political uncertainty being generated on both sides of the Channel, as both sides dance on the edge of the volcano, in laying out their negotiating positions, which for now appear a long way apart.”