Exchange Rate FAQs

What is Currency Pegging?

Pegging a currency is a method of stabilizing a countries currency by fixing its exchange rate to that of another country, often during times of financial or economic turmoil.  The main reason the method is implemented is to maintain stability, and to create a safer area for foreign investment. The peg allows the investor to know what the value of his investment is and will not have to worry about daily changes.

Pegging a currency can also help beat competitors in the export markets. A recent example of this is when China pegged it’s currency to that of the U.S dollar. By doing so it made Chinas exports cheap allowing the country’s economy to boom. Many other nations claimed that this gave China an unfair trade advantage. Another recent example is the Swiss Franc being pegged to the Euro.

A criticism of the pegging system is that by implementing such a policy it prevents flexible exchange rates to balance trade.