What Is a Currency Peg?
A currency peg is a country or government’s exchange rate policy whereby it attaches, or links, the central bank’s rate of exchange to another country’s script. Also referred to as a fixed exchange rate or a pegged exchange rate, a currency peg stabilizes the exchange rate between countries. Doing so provides long-term predictability of exchange rates for business planning and can anchor rates at advantageous levels for large importers.
How Does a Currency Peg Work?
KEY TAKEAWAYS
A currency peg is used to stabilize the exchange rate between countries often to the advantage of large importers.
A pegged currency remains low artificially, which creates an anti-competitive trading environment compared to a floating exchange rate.
U.S. manufacturers consider that the yuan’s peg to the dollar allows the Chinese to provide low-priced goods at the expense of U.S. jobs.
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