A currency peg (or fixed exchange rate) is a monetary policy regime in which a government or central bank commits to maintaining its currency's value at a specified rate relative to an anchor — most often the US dollar or the euro, sometimes a trade-weighted basket, and historically gold. The central bank defends the peg by buying or selling its own currency in foreign-exchange markets and by aligning interest rates with the anchor economy.
Pegs come in several forms. A hard peg includes currency boards (e.g., Hong Kong's link to the US dollar since 1983) and outright dollarization (Ecuador adopted the US dollar in 2000). A conventional peg allows the rate to fluctuate within a narrow band. A crawling peg adjusts the central rate on a pre-announced schedule, often to accommodate inflation differentials.
Governments adopt pegs to import monetary credibility, stabilize trade and investment flows, and tame inflation. The trade-off is the loss of independent monetary policy — a constraint formalized in the Mundell-Fleming "impossible trinity": a country cannot simultaneously have a fixed exchange rate, free capital movement, and an autonomous interest-rate policy.
Pegs are vulnerable to speculative attack when markets doubt the central bank's ability or willingness to defend them. Notable breakdowns include:
- The UK's exit from the European Exchange Rate Mechanism on Black Wednesday, 16 September 1992, after pressure from George Soros and other speculators.
- Thailand's abandonment of its dollar peg on 2 July 1997, which triggered the Asian financial crisis.
- Argentina's collapse of its 1-to-1 peso–dollar currency board in January 2002.
- Switzerland's surprise removal of the EUR/CHF floor of 1.20 on 15 January 2015.
China's managed peg to the dollar — and later to a basket — has been a recurring point of diplomatic friction, particularly in US Treasury currency-manipulation reports. The IMF classifies member countries' exchange-rate arrangements annually in its Annual Report on Exchange Arrangements and Exchange Restrictions (AREAER).
Example
In January 2015, the Swiss National Bank abruptly abandoned its 1.20 floor against the euro, causing the franc to surge roughly 20% within minutes.
Frequently asked questions
A currency board is a stricter form of peg that legally requires the central bank to back domestic currency one-for-one with reserves of the anchor currency, leaving almost no discretion. A conventional peg allows more policy flexibility.
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