Currency Peg
A currency peg is a policy under which a central bank fixes its currency's exchange rate to another currency or a basket and stands ready to buy and sell at that rate. The peg lasts only as long as the reserves and credibility behind it.
Also called: fixed exchange rate · pegged exchange rate · exchange-rate peg · pegged currency
Pegs come in degrees. A conventional peg keeps the rate within a narrow margin of a target. A currency board goes further and backs the domestic money supply with foreign assets, as Hong Kong does to hold its dollar between 7.75 and 7.85 to the US dollar. The Gulf states peg to the dollar, and the two CFA francs are fixed to the euro at 655.957.
The benefit is predictability: importers can plan, inflation is easier to contain and foreign investors face less exchange risk. The cost is independence. A pegged country cannot set interest rates freely or let its currency fall to regain competitiveness, and it must hold enough reserves to meet everyone who wants to convert.
When markets doubt that it can, the peg is tested. Defending it burns reserves; abandoning it means a sharp devaluation. Countries often tighten capital controls precisely to protect a peg they value.
In practice
A stable pegged rate says nothing about whether the currency can actually be obtained or moved at that rate. Check convertibility and controls separately.
Commonly confused with
| Term | How it differs |
|---|---|
| Dollarization | Under a peg the local currency still exists and the peg can be changed. Under official dollarization there is no local currency left to devalue. |
See also
- CFA FrancThe CFA franc is the name shared by two separate currencies used by fourteen African countries: the West African CFA franc (XOF) and the Central African CFA franc (XAF). Both are pegged to the euro at the same rate but are issued by different central banks.
- DevaluationDevaluation is a deliberate official reduction in the value of a currency that is fixed or managed against another. It makes exports cheaper and imports dearer overnight, and is usually forced by reserves running too low to defend the old rate.
- Currency ConvertibilityCurrency convertibility is the ability to exchange a currency for foreign currency without official restriction. A currency may be convertible for trade payments but restricted for investment flows, and a legal right to convert does not guarantee the foreign currency is available.
- Foreign Exchange ReservesForeign exchange reserves are the foreign-currency assets a central bank holds and can use at short notice: deposits and government securities in major currencies, gold, Special Drawing Rights and the country's reserve position at the IMF.
- DollarizationDollarization is the use of a foreign currency, usually the US dollar, in place of or alongside a country's own for saving, pricing and payment. It can be official policy or something households and firms do on their own.
- StablecoinA stablecoin is a crypto-asset designed to hold a steady value against a reference, almost always a fiat currency such as the US dollar. How that steadiness is supported differs sharply from one issuer to the next, and so does what a holder can actually redeem.