A fixed exchange rate (also called a pegged rate) is a policy choice in which a government or central bank commits to maintaining its currency at a declared parity against an external anchor — typically the US dollar, the euro, a basket of trading-partner currencies, or historically gold. To hold the peg, the monetary authority intervenes in foreign-exchange markets, buying or selling its own currency using reserves, and often subordinates domestic interest-rate policy to the goal of defending the rate.
Fixed regimes exist on a spectrum. Hard pegs include currency boards (e.g., Hong Kong's link to the US dollar, in place since 1983) and outright dollarization or euroization (e.g., Ecuador adopted the US dollar in 2000). Soft pegs include conventional pegs, crawling pegs, and bands, where authorities allow limited fluctuation. The post-war Bretton Woods system (1944–1971) was the most prominent multilateral example: members pegged to the US dollar, which was in turn convertible to gold at $35/ounce, until US President Richard Nixon suspended convertibility in August 1971.
The trade-offs are captured by the impossible trinity: a country cannot simultaneously have a fixed exchange rate, free capital movement, and an independent monetary policy. Pegs deliver price-stability credibility and lower transaction costs for trade and investment, but they constrain the central bank's ability to respond to domestic shocks and can attract speculative attacks if markets doubt the parity is sustainable. Notable collapses include the UK's exit from the European Exchange Rate Mechanism on Black Wednesday (16 September 1992), the 1994 Mexican peso crisis, the 1997–98 Asian financial crisis (Thailand floated the baht on 2 July 1997), and Argentina's 2002 abandonment of its 1:1 convertibility plan with the dollar.
The IMF classifies members' de facto regimes annually in its Annual Report on Exchange Arrangements and Exchange Restrictions (AREAER), distinguishing several categories of pegs from managed and free floats.
Example
In 1983, Hong Kong established a currency board pegging the Hong Kong dollar at roughly 7.80 to the US dollar, a fixed-rate arrangement maintained by the Hong Kong Monetary Authority to the present.
Frequently asked questions
A currency board is a strict form of fixed rate: it legally requires domestic currency in circulation to be fully backed by foreign reserves at the declared parity, eliminating discretionary monetary policy. Conventional pegs allow more central-bank discretion.
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