Currency basket peg - Financial definition
Concise definition of the term currency basket peg
A currency basket peg is a type of exchange rate regime where a country's currency is tied to a weighted basket of multiple foreign currencies. This method aims to stabilize the domestic currency by diversifying the risk associated with dependence on a single foreign currency.
Comprehensive definition of the term currency basket peg
A currency basket peg involves anchoring a nation's currency to a combination of several foreign currencies, typically chosen from its major trading partners. The weights assigned to each currency in the basket reflect their importance in trade or economic transactions with the pegging country. This strategy helps mitigate the volatility that can arise from fluctuations in any single currency, providing a more stable exchange rate environment.
Practical examples include the Special Drawing Rights (SDR) used by the International Monetary Fund (IMF), which includes a basket of major international currencies such as the US dollar, euro, Chinese yuan, Japanese yen, and British pound.
Market practices for maintaining a currency basket peg involve regular monitoring and adjustments by the central bank to ensure the domestic currency remains within a specified range relative to the basket's value. This approach requires robust foreign exchange reserves and active intervention in the forex market to counteract potential imbalances.