Currency peg - Financial definition
Concise definition of the term currency peg
A currency peg is a policy in which a country fixes its currency's exchange rate to another currency. This is done to stabilize the exchange rate and control inflation.
Comprehensive definition of the term currency peg
A currency peg involves a country's central bank committing to maintaining its currency's value at a fixed exchange rate relative to a reference currency, such as the US dollar or the euro. This can help stabilize trade and investment flows by reducing exchange rate volatility. For example, Hong Kong pegs its currency to the US dollar to maintain economic stability.
Market practices include the central bank intervening in the foreign exchange market by buying or selling its own currency to maintain the peg. While pegs can provide economic stability, they can also lead to imbalances if the fixed rate does not reflect the true market value of the currency.