What is pegged currency?

Pegging is a method of fixing a country’s currency to stay at a certain rate below or above Another Country’s currency.

Pegging is characterized by having a fixed exchange rate. When a country pegs their money to a commodity – gold, silver, uranium – The value of the currency would then be in direct proportion to the value of the commodity. A country can have control of its currency by trading it in the world exchange market: if the exchange rate is too low, they can sell some of their currency; if the exchange rate is too high, then exports are reduced and the likely result is a recession; this is happening in South East Asia.

In 1995, the US dollar began to rise in value. Many of the Asian countries had currencies pegged to the American dollar. When the dollar rose, the value of the Asian currencies rose correspondingly. However, this caused the inflation rates to rise considerably in the Asian markets.

As a consequence, exchange rates rose and the Asian countries fell into recession. As of June ’98, the Hong Kong currency has been pegged to the US dollar; this has helped Hong Kong survive the Asian Crisis because their currency has not dropped extensively. However, their peg may have to be dropped due to inflation and rising costs of real estate.

Most developing countries will peg their currency to help them get started. Importantly, they have also to agree to trade their currency at any given time with the country they are pegged to.