Currency peg definition (2024)

FAQs

What is the meaning of currency peg? ›

A currency peg is a governmental policy of fixing the exchange rate of its currency to that of another currency, or occasionally to the gold price. It can sometimes also be referred to as a fixed exchange rate, or pegging.

A currency peg is primarily used to provide stability to a currency by attaching its value, in a predetermined ratio, to a different and more stable currency. As the world's most widely held reserve currency, the US dollar (USD) is unsurprisingly the currency to which most currencies are pegged to.

Why Are Currencies Pegged to the USD? Countries mainly peg their currencies to the USD for stability. This encourages trade with the nation as it reduces foreign exchange rate risk and other risks, such as political risk.

Several countries have pegged their currency to another currency or a basket of currencies. Examples of countries with pegged currencies include Saudi Arabia (pegged to the US dollar), Hong Kong (pegged to the US dollar), and the United Arab Emirates (pegged to the International Monetary Fund's Special Drawing Rights).

By pegging its currency, a country can gain comparative trading advantages while protecting its own economic interests. A pegged rate, or fixed exchange rate, can keep a country's exchange rate low, helping with exports. Conversely, pegged rates can sometimes lead to higher long-term inflation.

Price/earnings-to-growth ratio

The price/earnings-to-growth, or PEG, ratio tells a more complete story than P/E alone because it takes growth into account. Investors are often willing to pay a higher premium for greater earnings growth, whether it's from past growth or estimated future growth.

Prior to 1971, the US dollar was backed by gold. Today, the dollar is backed by 2 things: the government's ability to generate revenues (via debt or taxes), and its authority to compel economic participants to transact in dollars.

Is the U.S. Dollar a Fixed or Floating Exchange Rate? The U.S. dollar is a floating currency, much like most of the major currencies in the world. The value of the dollar floats with its demand in the global currency markets. At one point, the U.S. dollar was a fixed currency with its peg to the value of gold.

Under the Bretton Woods system, the external values of foreign currencies were fixed in relation to the U.S. dollar, whose value was in turn expressed in gold at the congressionally-set price of $35 per ounce.

China pegged its currency from 1997 to 2005 to the U.S. dollar but since has managed its currency against a basket of currencies. The effect of the peg and the low currency is that Chinese exports are cheaper and, therefore, more attractive compared to those of other nations.

Is the real pegged to the dollar? ›

Brazil pegged its currency to the US dollar and tightly controlled its foreign exchange rate up until 1999. The real is designated as R$, and it is subdivided into 100 centavos. The real's foreign exchange symbol is BRL. As of late 2020, USD/BRL trades at 5.10 Brazilian reals to 1 US dollar.

The correct answer is D (Chinese Yuan). Pegged currency has been set to be fixed in terms of exchange rates with other foreign currencies. The currency does not fluctuate as the government sets it to be fixed. There is a currency peg in the Chinese yuan.

A currency peg is when the government or monetary authority of a country fixes a specific exchange rate with a foreign country's currency. A currency peg could also be with reference to a set of currencies or with reference to other widely traded commodities.

Why Would a Country Peg Their Currency? The most common reasons include encouraging trade between nations, reducing the risks associated with expanding into broader markets and stabilizing the economy.

C) Hong Kong dollar against the U.S. dollar in 1997 - This peg has been successful for over 30 years, with Hong Kong maintaining a stable exchange rate and low inflation.

In the cryptocurrency context, pegging is the process of attaching one coin's market value to the value of another coin or real-world asset, such as gold or fiat currency. The goal of pegging is to stabilize a cryptocurrency asset by tying its value to a cryptocurrency or asset that maintains a consistent value.

Since 2005 the Chinese Yuan is not pegged to any other currency and is on a floating exchange rate. A floating exchange rate is when a nation allows the value of its currency to be dictated, to some extent, by supply and demand.

Argentina pegged the peso to the dollar in the early 1990s as a weapon against inflation, and President Carlos Menem announced his intent to fully dollarize in 1999. But the dollar peg lost support during a deep recession, and President Eduardo Duhalde severed the 1:1 link in early 2002.