What Is a Currency Peg, and Why Do Countries Use One?
Most major currencies “float” — their value moves freely with supply and demand. But dozens of currencies are pegged: fixed to another currency at a set rate. Here’s why.
How a peg works
A country promises to keep its currency at, say, a fixed number per US dollar. To hold the line, its central bank buys or sells its own currency using foreign reserves whenever the market pushes the rate off target.
Why do it?
- Stability: a peg removes exchange-rate uncertainty for trade and investment.
- Credibility: pegging to a stable currency can import that stability and tame inflation.
- Commodity income: oil exporters like the UAE and Saudi Arabia peg to the dollar because oil is priced in dollars.
The catch
Pegs require big reserves to defend, and they remove a country’s freedom to set its own interest rates. If markets doubt a peg can hold, they attack it — and broken pegs have triggered major crises. It’s stability bought at the price of flexibility. Explore how pegged and floating currencies convert on our live tool.