A currency peg is a monetary policy in which a country's central bank fixes its exchange rate to another currency, a basket of currencies, or a commodity like gold. Pegged exchange rates provide stability and predictability for international trade but require the central bank to maintain sufficient foreign reserves to defend the fixed rate. If reserves are depleted, the peg may break, often resulting in a sharp devaluation and significant market volatility.
Example
“The Hong Kong dollar has been pegged to the US dollar since 1983 at a rate of approximately 7.80 HKD per USD, with the Hong Kong Monetary Authority maintaining this peg by intervening in currency markets as needed.”