A currency peg is a governmental policy of fixing the exchange rate of its currency to that of another currency, or occasionally to the gold price. It can sometimes also be referred to as a fixed exchange rate or pegging.
Usually, this kind of exchange rate policy allows a country’s domestic currency to fluctuate within a narrow range (usually between -1% to +1%) against the value of another currency.
Currency pegging is usually done by countries that wish to stabilize their global trade operations. By using a currency peg, the risk caused by exchange rate fluctuations of businesses involved in international trade is reduced.
This kind of exchange rate policy is very useful for countries with robust trade industries. China, the Bahamas, and the Marshall Islands have pegged their currencies to the U.S. dollar. Niger and Senegal have pegged their currencies to the French franc. Bangladesh, Czech Republic, and Thailand have pegged their currencies to a basket of several select currencies.
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