Currency Peg
A policy fixing a country's exchange rate to another currency or basket to stabilize trade and inflation.
What is Currency Peg?
A currency peg is a monetary policy in which a country fixes its exchange rate at a predetermined level relative to another currency (most commonly the US dollar), a basket of currencies, or a commodity such as gold. The central bank maintains the peg by buying or selling its currency in foreign exchange markets using its foreign reserves. Currency pegs provide exchange rate stability, which can reduce inflation and support trade and investment — particularly important for small, export-dependent economies. However, they require substantial reserves to defend and can become unsustainable if the fixed rate diverges from economic fundamentals, as demonstrated by the 1997 Asian financial crisis.
Example
Hong Kong has maintained its currency peg to the US dollar at approximately HKD 7.80 per USD since 1983 under the Linked Exchange Rate System managed by the Hong Kong Monetary Authority. The peg has been defended through multiple crises, including the 1997–98 Asian financial crisis and the 2020 pandemic, and provides the predictability underpinning Hong Kong's role as an international financial center.
Source: Hong Kong Monetary Authority — Linked Exchange Rate System