Currency Pegging

Currency pegging is a government policy where a country's central bank stabilizes its currency's value by tying it to another more stable currency, such as the US dollar or euro. This means the local currency's exchange rate is maintained at a fixed rate relative to the chosen foreign currency. The central bank actively intervenes in the foreign exchange market to keep this rate consistent, helping to promote economic stability, control inflation, and encourage trade. However, maintaining a peg requires significant reserves and can be challenging if economic conditions or currency values shift dramatically.