Currency peg

A currency peg is an exchange-rate policy that fixes a currency’s value to another currency or a basket of currencies, limiting fluctuations in its exchange rate.

Foreign exchange market: A global network where currencies are traded and exchange rates are determined. Market supply and demand can push a pegged currency away from its official rate.
Floating exchange rate: An exchange-rate regime in which currency values are primarily determined by market supply and demand. Unlike a peg, a float allows the exchange rate to adjust without defending a fixed target.
Bretton Woods system: The postwar international monetary system of fixed but adjustable exchange rates, centered on the US dollar and gold. It established a major network of national currency pegs after the Second World War.
Impossible trinity: The principle that a country cannot simultaneously maintain a fixed exchange rate, free capital movement, and independent monetary policy. A peg forces policymakers to choose between monetary autonomy and unrestricted capital flows.
Central bank intervention: A central bank’s actions to influence financial conditions or the exchange rate, often through asset purchases or sales. Buying or selling currencies helps defend the peg when market pressure builds.
Managed float: An exchange-rate regime in which market forces set currency values, while authorities intervene intermittently. It permits intervention without a standing commitment to a fixed exchange rate.
Hong Kong dollar: The currency of Hong Kong, maintained within a linked exchange-rate system against the US dollar. Its linked system is a prominent modern example of a long-running peg.
Currency crisis: A rapid loss of confidence in a currency that can trigger sharp depreciation or the collapse of an exchange-rate regime. Doubts about a peg can prompt investors to sell the currency and exhaust reserves.
Foreign exchange reserves: Assets held by monetary authorities in foreign currencies, gold, or other forms usable for international payments. Reserves provide foreign currency for supporting a peg under pressure.
Monetary union: An arrangement in which multiple countries share a currency and a common monetary authority or policy. A shared currency removes national exchange rates rather than fixing them between separate currencies.

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