A currency peg is a exchange rate policy by which a country's exchange rate is fixed to a set amount of another currency. That currency can then be used to calculate the value of the pegged currency into all other currencies. A pegged currency may also be pegged to a basket of several different currencies rather than a single currency.A currency peg is also referred to as a fixed exchange rate, pegged exchange rate or a locked exchange rate.
A currency peg allows a country to maintain a consistent value against other major currencies. For example, China was formerly pegged to the U.S. dollar (USD), meaning the yuan was worth a consistent number of USD. This peg could be adjusted up or down, but China usually kept the yuan undervalued to make certain exports from China would be cheaper and more attractive to other countries. Despite the rising GDP of China, the government refused to float the yuan and potentially lose its pricing edge. Under international pressure, China did switch to a basket of currencies and agree to adjust the peg regularly. A currency peg is sometimes compared to the gold standard, but the comparison is fraught with problems. If a true gold standard is backing a currency, then that piece of currency can be exchanged for a set amount of gold. In the case of a currency peg, one piece of fiat currency is being traded for another at a set rate, but no physical assets can be claimed.
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