what is a currency peg 
a currency peg is a policy in which a national government or central bank sets a fixed exchange rate for its currency with a foreign currency or a basket of currencies and stabilizes the exchange rate between countries the currency exchange rate is the value of a currency compared to another while some currencies are free floating and rates fluctuate based on supply and demand in the market others are fixed and pegged to another currency pegging provides long term predictability of exchange rates for business planning and helps to promote economic stability investopedia jessica olahunderstanding currency peggingthe primary motivation for a currency peg is to encourage trade between countries by reducing foreign exchange risk countries commonly establish a currency peg with a stronger or more developed economy so that domestic companies can access broader markets with less risk the u s dollar the euro and gold have historically been popular choices currency pegs create stability between trading partners and can remain in place for decades for example the hong kong dollar has been pegged to the u s dollar since 1983 2only realistic currency pegs aimed at reducing volatility can produce economic benefits setting a currency peg artificially high or low creates imbalances that ultimately harm all countries involved advantages of a currency pegpegged currencies can expand trade and boost real incomes particularly when currency fluctuations are relatively low and foresee no long term changes without exchange rate risk and tariffs individuals businesses and nations are free to benefit fully from specialization and exchange with fixed exchange rates and within a mutually beneficial economic framework farmers may be able to effectively produce technology firms may be able to expand research and development and retailers will be able to source from efficient producers pegging allows for long term investments in other countries as fluctuating exchange rates are not disrupting supply chains and altering the value of investments disadvantages of a currency pegthe central bank of a country with a currency peg must monitor and manage cash flow and avoid spikes in a currency s supply and demand these spikes can require a central bank to hold large foreign exchange reserves to counter excessive buying or selling of its currency currency pegs affect forex trading by artificially stemming volatility 