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What is a Pegged Currency?

A pegged currency is a type of exchange rate system in which the value of a currency is fixed to the value of another currency or a commodity, such as gold. This means that the central bank or other regulatory authority in the country whose currency is pegged will intervene in the foreign exchange market to maintain the fixed exchange rate. The goal of pegging a currency is to stabilize its value of the currency and reduce exchange rate fluctuations, which can have negative effects on trade and the economy.

There are several types of pegged exchange rate systems, including:

  1. Hard peg: This is a fixed exchange rate system in which the value of the pegged currency is set at a specific level and cannot fluctuate.
  2. Soft peg: This is a flexible exchange rate system in which the pegged currency can fluctuate within a certain range around the fixed exchange rate.
  3. Crawling peg: This is a type of flexible exchange rate system in which the pegged currency’s value is adjusted periodically based on changes in a specified economic indicator, such as inflation.

It’s worth noting that pegging a currency can have both benefits and drawbacks. On the one hand, it can help to stabilize the value of the currency and reduce exchange rate risk for businesses and individuals. On the other hand, it can also restrict the central bank’s ability to use monetary policy to manage the economy and may not always be an effective way to address underlying economic problems.

This page was last updated on January 3, 2023.