Currency Peg
A currency peg is when a country fixes the value of its currency to another currency or a basket of currencies. This means that the exchange rate remains stable, making it easier for businesses and investors to plan and trade internationally. For example, if a country pegs its currency to the US dollar, it will always maintain a specific exchange rate with the dollar. While this can provide stability, it limits the country’s ability to adjust its monetary policy freely, which can be both beneficial and challenging depending on economic conditions.
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A currency peg is a monetary policy where a country's government ties its currency's value to another major currency, such as the US dollar or the euro. This means that the exchange rate remains fixed or within a narrow band relative to the pegged currency. The goal is to provide stability in trade and investment by reducing exchange rate fluctuations. For example, if a country pegs its currency at 1:1 with the US dollar, it means that one unit of the local currency is always worth one US dollar, enhancing predictability for businesses and investors.