Pegged Exchange Rate

Pegged exchange rate

Exchange rate whose value is pegged to another currency's value or to a unit of account.

---

Pegged Exchange Rate

An exchange rate for a currency in which the government has decided to link the value to another currency or to some valuable commodity like gold. For example, under the Bretton Woods System, most world currencies pegged themselves to the U.S. dollar, which in turn pegged itself to gold. A government may peg its currency by holding reserves of the peg in the central bank. For example, if a country pegs its currency to the British pound, it must hold enough pounds in reserves to account for all of its currency in circulation. Importantly, pegged exchange rates do not change according to market conditions.