PeggingPegging is the practice of setting a fixed exchange rate b... More is the practice of setting a fixed between two currencies. Sometimes one currencyWhat is currency? Currencies are the generally accepted medi... More may be pegged to a basket of other currencies.
Pegging can help to stabilise the value of a currency. Many countries peg their exchange rateThe exchange rate refers to the amount of one currency yo... More to the , particularly if they have their own national dollar.
In Europe, a number of non-eurozone countries have pegged their currency to the euro. Inside the eurozoneThe eurozone consists of 17 European member states of the Eu... More countries pre-euro remain denominated in the former currencies, such as French francs or German marks, which themselves remain pegged to each other as one means of keeping the euro stable.
Although the yuan no longer has a fixed rate itself, some other far eastern currencies are still pegged to China’s currency.
Sometimes a country may peg its currency to a such as . This was a widespread practice when the was in global use as a peg, although it is much less common now.
Does pegging affect trading?
Traders should pay attention to pegged currencies – where one currency is pegged very closely to another, traders are likely to see very narrow and .
Trading and making investments are smoothed when two countries enjoy pegged currencies. For smaller countries that depend on to boost their and/or rely on imports for many essentials, pegging can make a huge difference to their economies. However, any change in fortune of the currency they have pegged to, such as the U.S. dollar, (the so-called reference value) will affect the fixed exchange rate and thus their own economy.
Domestically, a country that has pegged its currency to another will find easier to control but, conversely, will be unable to set a domestic because of the decision to be part of a macroeconomy that offers stability.
Countries will buy and sell their own currency on the markets to keep the pegged rate stable. They will buy, using their own reserves, if the rate starts to drift downwards – buying increases demand and helps push the rate upward again. Conversely, if the rate creeps above the pegged level they will sell their own currency to reduce its value and cut demand in orderWhat is a trade order? In trading, an order can be defined... More to level the rate again. Selling will boost a country’s reserve of foreign currencies.
