Currency Peg
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What Is Currency Peg?
A currency peg is an exchange-rate policy in which a government fixes the value of its currency to another, often the U.S. dollar, rather than letting it float freely in the market. Pegs can promote stability and predictability for trade and investment, but maintaining one requires the central bank to buy or sell foreign reserves to hold the rate, and a peg can become a target for speculators if markets doubt it can be sustained. Before floating the baht in July 1997, Thailand's central bank spent down its foreign currency reserves in an ultimately unsuccessful effort to defend its peg.
Why It Matters
Currency pegs matter because their vulnerability was at the core of the 1997 Asian financial crisis, which is studied as a classic illustration of the difference between fixed and floating exchange rates. When speculators bet against overvalued pegs, defending them drained reserves until governments were forced to devalue, as with the baht and the South Korean won. Outcomes varied: Hong Kong successfully defended its dollar peg through a currency board and direct market intervention, while many others abandoned fixed rates for more flexible regimes afterward. The episode taught policymakers how a rigid exchange rate combined with heavy foreign-currency debt can leave an economy exposed to sudden, self-fulfilling attacks.