In plain English
What Currency peg means
A peg is designed to reduce exchange-rate movement against the anchor. The central bank or exchange authority may use reserves, interest-rate policy, or capital controls to support the peg. The strength of the peg can vary, from a hard fixed rate to a narrower managed band.
Why it matters
A peg can change inflation transmission, trade pricing, and currency risk. It may make pricing more stable against the anchor currency, but it can also force the central bank to defend the rate and limit policy freedom.
Example
If a currency is pegged at 3.75 to 1 U.S. dollar, the authorities may buy or sell foreign exchange to keep market trading close to that level. Simplified example.
Quick answers
Common questions
Is a peg always a fixed rate?+
Not always. Some pegs are strict; others are banded or managed around a central level.
Can a peg fail?+
Yes. If market pressure overwhelms the authorities’ ability or willingness to defend it, the peg can come under strain or break.
Sources