when a currency is pegged at an excessively low exchange rate domestic consumers will be deprived of the purchasing power to buy foreign goods if the chinese yuan is pegged too low against the u s dollar chinese consumers will have to pay more for imported food and oil lowering their consumption and affecting their standard of living the sellers u s farmers and middle east oil producers see a decrease in demand and business loss and trade tensions may escalate among the countries 
if a currency is pegged at an overly high rate a country may be unable to defend the peg over time domestic consumers may buy too many imports and drive up demand chronic trade deficits create downward pressure on the home currency forcing the government to spend foreign exchange reserves to defend the peg if government reserves are exhausted the peg will collapse as a currency peg collapses the country that set the peg high will find imports more expensive inflation will rise and the nation may have difficulty paying its debts the other country will find its exporters losing markets and its investors losing money on foreign assets that are no longer worth as much in domestic currency major currency peg breakdowns include the argentine peso to the u s dollar in 2002 the british pound to the german mark in 1992 and arguably the u s dollar to gold in 1971 345expands trade and boosts real incomesmakes long term investments realisticreduces disruptions to supply chainsminimizes changes to the value of investmentsaffects forex trading by artificially stemming volatilityerodes purchasing power when pegged too lowcreates trade deficits when pegged too highincreases inflation when pegged too highexample of a currency pegsince 1986 the saudi riyal has been pegged at a fixed rate of 3 75 to the usd 6 the arab oil embargo of 1973 saudi arabia s response to the united state s involvement in the arab israeli war precipitated events that led to the currency peg the effects of the short lived embargo devalued the u s dollar and led to economic turmoil the nixon administration drafted a deal with the saudi government to restore the usd to the super currency it once was from this arrangement the saudi government enjoyed the use of u s military resources an abundance of u s treasury savings and a booming economy saturated with the usd during the embargo the riyal was supported by special drawing rights sdr an international reserve asset created by the international monetary fund to supplement the official reserves of its member countries with freely usable currencies of imf members to provide a country with liquidity 7due to high inflation and the 1979 energy crisis the riyal suffered a devaluation leading the saudi government to peg the riyal to the us dollar the currency peg restored stability and lowered inflation the saudi arabian monetary authority sama credits the peg for supporting economic growth in its country and for stabilizing the cost of foreign trade 8