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Currency Peg

A currency peg, also known as a fixed exchange rate, is a system where a country's currency is tied to the value of another currency, usually the U.S. dollar or a basket of currencies. The pegging country’s central bank maintains the exchange rate within a specific range by buying or selling its own currency in foreign exchange markets. Currency pegs are used to stabilize exchange rates and promote trade by reducing currency volatility.

Example

The Hong Kong dollar is pegged to the U.S. dollar, with the Hong Kong Monetary Authority maintaining the exchange rate around 7.80 HKD per USD.

Key points

• A currency peg ties a country’s currency to the value of another currency or a basket of currencies.

• Central banks maintain the peg by intervening in forex markets.

• Pegging stabilizes exchange rates, reducing currency volatility and promoting trade.

Quick Answers to Curious Questions

A currency peg stabilizes a country's exchange rate, reducing volatility and promoting international trade by tying its value to a more stable currency.

Central banks maintain pegs by buying or selling their own currency in foreign exchange markets to keep the exchange rate within a specific range.

The Hong Kong dollar is pegged to the U.S. dollar, with the central bank intervening to keep the exchange rate stable.