Macro & Central BanksFixed Exchange RateCurrency Board
Currency Peg
An arrangement in which a country fixes its currency's value to another currency or basket, defended by the monetary authority.
What Currency Peg means
A currency peg is a regime in which the authorities commit to holding the exchange rate at or near a fixed value against another currency or a basket. Variants include a hard peg or currency board, where domestic money is fully backed by foreign reserves, a band within which the rate is allowed to fluctuate, and a crawling peg that is adjusted on a schedule. Pegs are typically adopted to import price stability, reduce transaction costs for trade, or anchor expectations after a period of high inflation.
Defending a peg requires the central bank to buy or sell its own currency using reserves and to subordinate domestic interest rates to the defence, which means giving up independent monetary policy. That trade-off is the source of the risk: if fundamentals diverge far enough from the fixed rate, reserves drain and speculative pressure builds. For traders, pegged pairs offer very low volatility with a fat tail, since an abandoned peg or floor can produce an enormous one-off move and severe illiquidity in the moment.
Worked example
A pegged currency may trade in a band of just a few tenths of a percent for years, then move several percent in minutes if the arrangement is abandoned, which can leave stop orders filled far from their trigger price. Illustrative example.
Related terms
- Currency InterventionOfficial buying or selling of a currency by a central bank or finance ministry to influence its exchange rate.
- Central BankThe public institution responsible for a currency's monetary policy, issuance and financial stability.
- Exotic PairsPairs combining a major currency with an emerging or thinly traded currency, such as USD/TRY or USD/ZAR.
- Purchasing Power Parity (PPP)The theory that exchange rates should adjust so that a basket of goods costs the same across countries once converted into a common currency.
Frequently asked questions
What does Currency Peg mean in forex trading?
An arrangement in which a country fixes its currency's value to another currency or basket, defended by the monetary authority.
How does Currency Peg work in practice?
Defending a peg requires the central bank to buy or sell its own currency using reserves and to subordinate domestic interest rates to the defence, which means giving up independent monetary policy. That trade-off is the source of the risk: if fundamentals diverge far enough from the fixed rate, reserves drain and speculative pressure builds. For traders, pegged pairs offer very low volatility with a fat tail, since an abandoned peg or floor can produce an enormous one-off move and severe illiquidity in the moment.
What is an example of Currency Peg?
A pegged currency may trade in a band of just a few tenths of a percent for years, then move several percent in minutes if the arrangement is abandoned, which can leave stop orders filled far from their trigger price. Illustrative example.
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