What Is a Currency Peg?
A currency peg is a policy in which a national government sets a specific fixed exchange rate for its currency with a foreign currency or a basket of currencies. Pegging a currency stabilizes the exchange rate between countries. Doing so provides long-term predictability of exchange rates for business planning. However, a currency peg can be challenging to maintain and distort markets if it is too far removed from the natural market price.
Understanding Currency Pegs
Currency pegging is usually done by countries that wish to stabilize their global trade operations.
Using a currency peg reduces the risk caused by exchange rate fluctuations of businesses involved in international trade.
This kind of exchange rate policy is beneficial for countries with robust trade industries.
China, the Bahamas, and the Marshall Islands have pegged their currencies to the U.S. dollar.
Niger and Senegal have pegged their currencies to the French franc.
Bangladesh, Czech Republic, and Thailand have pegged their currencies to a basket of several select currencies.