A currency peg is a fixed exchange rate system where a country’s currency is tied or "pegged" to another major currency, such as the U.S. dollar or the euro. This means the pegged currency maintains a consistent value relative to the anchor currency.

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Purpose:

• To provide stability in exchange rates.
• To encourage trade and investment by reducing currency risk.
• Often used by countries with smaller or developing economies.

Example:

The Hong Kong dollar (HKD) is pegged to the U.S. dollar (USD) at a rate of approximately 7.8 HKD = 1 USD.

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A currency peg is maintained primarily through active intervention by a country's central bank in the foreign exchange market. The central bank commits to buying or selling its own currency in exchange for the anchor currency (such as the US dollar or euro) to keep the exchange rate at the predetermined fixed level.

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