A fixed exchange rate policy where a country's central bank maintains its currency at a set rate against another currency (usually USD or EUR) through active intervention and reserve management.
What Is a Currency Peg?
A currency peg (fixed exchange rate) is a policy where a Central Bank commits to maintaining its currency at a specific rate against a reference currency. The Hong Kong dollar has been pegged to the US dollar at approximately 7.80 since 1983. The Saudi riyal is pegged at 3.75 to USD. The Danish krone is pegged to the euro within a narrow band. To maintain the peg, the central bank must buy or sell its currency in the forex market as needed.
How Pegs Work
If the domestic currency faces selling pressure and threatens to weaken beyond the pegged rate, the central bank sells foreign reserves (USD, EUR) and buys its own currency to support it. If the currency strengthens beyond the peg, the bank sells its own currency and accumulates reserves. This requires substantial foreign exchange reserves and limits the central bank's ability to set independent Interest Rate policy.
Pegs and Forex Trading
Pegged currencies offer limited trading opportunities under normal conditions because their exchange rates barely move. However, peg breaks or adjustments create some of the largest single-day moves in forex history. The Swiss National Bank's removal of the EUR/CHF 1.2000 floor in January 2015 caused CHF to surge over 30% in minutes. Traders watch for signs of peg stress: declining reserves, rising interest rate differentials, and political pressure for Currency Devaluation.
Related Terms
Currency Devaluation
A deliberate downward adjustment of a currency's value relative to another currency or a basket of currencies, typically decided by the government or central bank of a country with a fixed or managed exchange rate.
Swiss National Bank
The central bank of Switzerland, responsible for monetary policy and managing the Swiss franc (CHF), known for safe-haven currency management and historical interventions in forex markets.
People's Bank of China
The central bank of China, responsible for monetary policy and managing the Chinese yuan (CNY/CNH), operating within a managed float exchange rate system with daily fixing rates.
Exchange Rate
The price of one currency expressed in terms of another currency. EUR/USD at 1.0850 means 1 euro equals 1.0850 US dollars.
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