Pegged Currency

What Is a Pegged Currency?

Imagine you have a currency that doesn’t want to ride the wild waves of the foreign exchange market. Instead, it prefers to stick close to the value of another currency, commodity, or even a group of currencies. That’s what we call a pegged currency.

A pegged currency is tied to something more stable to keep its value steady. Governments or monetary authorities set up this kind of peg to keep their currency from bouncing around too much, making things easier to predict for everyone involved.

How Does a Pegged Currency Work?

So, how does a pegged currency keep its peg? Typically, the central bank or the monetary authority steps in whenever the currency starts to drift too far from its target value. 

Let’s say your currency is pegged to the US dollar. If the value starts to slip, the central bank might swoop in, buying or selling the currency in exchange for US dollars to push the value back in line. It’s like having a safety net to make sure the currency doesn’t swing too far off course.

Common Types of Pegged Currencies

Not all pegged currencies are the same. Here are a few types you might come across: