Currency Pegging

Soft Peg: This type of currency pegging doesn't have a set exchange rate and is more flexible than a hard peg. It is allowed to float and is less intervened in by the government.

Crawling Peg: This type of pegging allows controlled appreciation and depreciation of the currency over an extended period.

Basket Peg: Here, the value of the currency is pegged to the value of a basket of currencies instead of just one.

Advantages of Currency Pegging

There are many advantages to adopting the currency pegging policy. Primarily, currency pegging stabilises a country’s economy. It can boost trade opportunities as currency pegging keeps currency fluctuations low. All sectors of the economy can benefit from this policy, as it reduces exchange rate risks. With pegged exchange rates, it is easier to make long-term investments in other countries. The fluctuating exchange rates do not disrupt the supply chains or change the value of investments.

Disadvantages of Currency Pegging

Aside from the many advantages, currency pegging also has some drawbacks. The major drawback with currency pegging is when a currency is pegged at a low exchange rate. Such an outcome can lead to the domestic customers losing their purchasing power. It is also unfavourable when the currency is pegged at a higher rate. This may create a situation where the country is unable to defend the peg over time. This can result in a trade deficit and negatively impact the economy tremendously.

When a currency peg collapses, the country with the higher peg will face inflation due to the high price of imports. The rising inflation and the trade deficit can be considered key disadvantages of currency pegging.

Currency Pegging and the US Dollar

Generally, countries peg their currencies to the strongest and most stable currency. At present, the US dollar is the most pegged currency, with around 66 countries. The US dollar is also considered the world’s reserve currency. The reason why the US dollar has a major place in the world economy is due to its stability in the international market and credibility.

The US dollar’s value is on the floating rate, and the pegged currency’s value fluctuates with it. Pegging to the US dollar also guarantees stability to the other currencies and helps expand trade considerably. It is also considered low risk to peg to the US dollar. The Saudi Riyal, Bahraini Dinar, Hong Kong Dollar, and the United Arab Emirates Dirham (AED) are some of the major currencies pegged to the US dollar.

Countries with Fixed Exchange Rates

Many countries have adopted fixed exchange rates (currency pegging), many of which are pegged to the US dollar. While the Saudi Riyal, Qatari Riyal, Hong Kong Dollar, etc. are pegged to the US dollar, currencies such as the Danish Krone, Moroccan Dirham, CFP Franc, etc., are pegged to the Euro.