What Is Pegged Exchange Rate.A pegged exchange rate is a fixed exchange rate system in which the value of one currency is fixed relative to another currency or a basket of currencies. This means that the exchange rate between the two currencies is set and maintained by the government or central bank of a country.
What Is Pegged Exchange Rate.
Under a pegged exchange rate system, the government or central bank buys or sells its currency on the foreign exchange market to maintain the fixed exchange rate. For example, if the value of the country’s currency is increasing relative to the pegged currency, the central bank may sell its currency to increase the supply of the currency and reduce its value. Similarly, if the value of the country’s currency is decreasing relative to the pegged currency, the central bank may buy its currency to decrease the supply and increase its value.
Pegged exchange rate systems can provide stability and predictability in international trade and investment, as the exchange rate remains relatively constant over time. However, maintaining a pegged exchange rate can also require significant intervention by the central bank, and can limit the ability of the country to adjust its monetary policy to changing economic conditions. Additionally, if the pegged currency experiences significant fluctuations, it can create economic challenges for the country with the pegged exchange rate.
