What Is a Pegged Currency?
A pegged currency is a type of exchange rate system in which the value of one currency is fixed against another. This means that the two currencies are linked together and their values remain constant relative to each other. The most common form of pegging involves linking a country’s domestic currency to an external anchor, such as the US dollar or Euro. By doing this, countries can maintain stability in their economies by preventing large fluctuations in their exchange rates with foreign currencies.
The main benefit of having a pegged currency is that it helps protect businesses from sudden changes in exchange rates due to market volatility. It also allows governments to control inflation and manage economic growth more effectively since they have greater control over how much money circulates within their economy. However, there are some drawbacks associated with pegging currencies; for example, if the peg becomes too strong then it may lead to deflationary pressures on prices and wages while if it becomes too weak then it could cause rapid inflationary pressures on prices and wages.