Pegged Exchange Rate System

A pegged exchange rate system is when a country’s government or central bank sets and maintains its currency’s value at a fixed rate relative to another currency or a basket of currencies. This system provides stability in international trade by reducing exchange rate fluctuations, making prices more predictable. To keep the peg, the country’s authorities buy or sell their own currency in the foreign exchange market as needed. While this offers stability, it requires significant reserves and can be challenging if economic conditions change or if the peg becomes unsustainable.