What is peg in exchange rate?

Currency pegging is a financial strategy where a country ties the value of its currency to another country's currency. This practice aims to ensure stability in the domestic currency and broader economy. By linking the value of its currency to a more stable one, a country can mitigate the risks associated with currency fluctuations.

The main objective of currency pegging is to provide economic stability. By pegging to a strong and stable currency, a country can avoid the volatility that often accompanies floating exchange rates. This stability can help attract foreign investment, which can drive economic growth and development.

Pegging a currency often involves setting a preset ratio or fixed exchange rate between the two currencies. This ratio remains constant, meaning that the value of the pegged currency will fluctuate in line with the value of the anchor currency. This fixed rate provides a clear and predictable exchange rate, which can help businesses and consumers plan and make informed decisions.

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