Currency Peg
FundamentalsA policy fixing a currency's exchange rate to another currency or basket, defended by the central bank rather than left to float freely.
A currency peg is a policy where a country fixes its exchange rate to another currency (usually the US dollar) or a basket of currencies, rather than letting it float freely against the market. The central bank defends the peg by buying or selling its own currency and adjusting interest rates as needed.
Pegged currencies can trade with very low day-to-day volatility for long stretches, but they carry the risk of a sudden, sharp devaluation if the central bank can no longer defend the fixed rate.