Currency Peg

A currency peg is a monetary policy strategy in which a country’s currency is pegged to the value of another currency or a basket of currencies.

Here’s a breakdown of the key points:

Types of currency pegs:

• Fixed peg: The value of the pegged currency is fixed to the value of the peg currency at a specific exchange rate. For example, USD pegged to EUR at 1 EUR = 1 USD.
• Flexible peg: The value of the pegged currency fluctuates within a range of values relative to the peg currency, but the central bank intervenes to keep it within that range.

Reasons for pegging:

• Stabilize exchange rates: Pegging can help to stabilize exchange rates, making it easier for businesses and investors to plan for the future.
• Control inflation: Pegging can also help to control inflation by keeping the value of the currency stable.
• Gain access to foreign markets: Pegging can allow a country to gain access to foreign markets by making its currency more attractive to foreign investors.

Challenges of pegging:

• Loss of autonomy: Pegging can limit a country’s ability to conduct independent monetary policy.
• Speculation: Pegging can encourage speculation on the value of the pegged currency, which can lead to market volatility.
• Unforeseen economic events: Pegging can be difficult to maintain in the face of unforeseen economic events, such as economic crises or changes in global demand.

Examples:

• The Hong Kong dollar is pegged to the US dollar at a fixed exchange rate of 1 USD = 7.8 HKD.
• The Vietnamese dong is pegged to the USD and the EUR, with a basket of currencies used to determine its value.

Overall, currency pegs can be a complex and controversial policy tool. They can be used to achieve a variety of economic goals, but also come with a number of challenges.