What are the disadvantages of a fixed exchange rate?

Less flexibility – One of the disadvantages of a fixed exchange rate is that it limits the country’s flexibility. For example, if the country’s currency is weak, it will have to devalue its currency in order to boost exports. This can lead to higher inflation and reduced economic growth. Another disadvantage is that it can create trade deficits.

Why is a fixed exchange rate so expensive?

A fixed exchange rate can be expensive to maintain. A country must have enough foreign exchange reserves to manage its currency's value. A fixed exchange rate can make a country's currency a target for speculators. They can short the currency, artificially driving its value down.

Why does a country need a fixed exchange rate?

A country must have enough foreign exchange reserves to manage its currency's value. A fixed exchange rate can make a country's currency a target for speculators. They can short the currency, artificially driving its value down. That forces the country's central bank to convert its foreign exchange, so it can prop up its currency's value.