# Understanding Currency Pegs: Benefits, Examples, and Global Impact

> **Definition**
>
> A currency peg is a government policy that sets a fixed exchange rate for its country's currency with a foreign currency.

## What Is a Currency Peg?

A [currency](https://www.investopedia.com/terms/c/currency.asp) peg is a policy by which a national government or central bank sets a [fixed exchange rate](https://www.investopedia.com/terms/f/fixedexchangerate.asp) for its currency according to a foreign currency or a basket of currencies. The peg stabilizes the exchange rate between countries because it reduces uncertainty, promotes trade, and boost economies. Some countries peg their currencies to stronger economies to expand markets and minimize risks. As of 2024, 12 countries pegged their currencies to the U.S. dollar.

### Key Takeaways

*   A currency peg sets a fixed exchange rate between a national currency and a foreign currency or basket of currencies.
*   Currency pegs reduce exchange rate risk, encourage trade, and promote economic stability between countries.
*   Countries often peg their currencies to stronger economies to expand markets and minimize risks.
*   Pegged currencies offer predictability but can lead to issues like trade deficits if rates are set improperly.
*   Central banks may use foreign reserves to maintain a currency peg and manage supply and demand.

![Currency Peg: When a government or central bank sets a fixed exchange rate for its currency with a foreign currency or basket of currencies.](https://www.investopedia.com/thmb/FFi6HB0KloR3O1AZ34R1yotNrWM=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/currency-peg.asp-final-fe79e540257844c99bf1fd4357f40a67.png)

*— Investopedia / Jessica Olah*

## Advantages of Currency Pegs

Currency pegs reduce [foreign exchange risk](https://www.investopedia.com/terms/f/foreignexchangerisk.asp), encouraging trade. They allow countries to align with stronger economies, helping domestic companies to access larger markets safely.

Some currencies float with market supply and demand, while others are pegged at fixed rates to other currencies. Pegging provides long-term predictability of exchange rates for business planning and helps to promote economic stability.

Historically, the U.S. dollar, the euro, and gold have been popular choices. Currency pegs create stability between trading partners and can remain in place for decades.

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## List of Currencies Pegged to the U.S. Dollar

As of 2024, 23 currencies were pegged to the U.S. dollar:  

*   Aruban florin
*   Bahamian dollar
*   Bahraini dinar
*   Barbadian dollar
*   Belize dollar
*   Bermudian dollar
*   Cayman Islands dollar
*   Cuban Convertible Peso
*   Djiboutian franc
*   East Caribbean dollar
*   Salvadoran colon
*   Eritrean nakfa
*   Hong Kong dollar
*   Jordanian dinar
*   Kuwaiti dinar
*   Lebanese pound
*   Antillean guilder
*   Omani rial
*   Panamanian Balboa
*   Qatari riyal
*   Saudi riyal
*   United Arab Emirates Dirham
*   Venezuelan bolívar

## Pros and Cons of Currency Pegging

Pegged currencies boost trade and real income, especially when currency fluctuations are low and stable. Without exchange rate risk and [tariffs](https://www.investopedia.com/terms/t/tariff.asp), individuals, businesses, and nations benefit fully from specialization and exchange. Central banks must monitor and manage cash flow and avoid spikes in a currency's supply and demand when pegs are in place.

Central banks often hold large [foreign exchange reserves](https://www.investopedia.com/terms/f/foreign-exchange-reserves.asp) to manage excessive currency buying or selling. Currency pegs affect forex trading by artificially stemming [volatility](https://www.investopedia.com/terms/v/volatility.asp). When a currency is pegged at a low exchange rate, domestic consumers will be deprived of the [purchasing power](https://www.investopedia.com/terms/p/purchasingpower.asp) to buy foreign goods. If a currency is pegged at a high rate, a country may be unable to defend the peg over time.

High import demand can lead to trade deficits, pressuring the home currency. This forces governments to use foreign reserves to maintain the peg. If government reserves are exhausted, the peg will collapse.

Pros

*   Expands trade and boosts real incomes
    
*   Reduces disruptions to supply chains
    
*   Minimizes changes to the value of investments
    

Cons

*   Affects forex trading by artificially stemming volatility
    
*   Erodes purchasing power when pegged too low
    
*   Creates trade deficits when pegged too high
    

## Real-World Example: Saudi Riyal Peg to the USD

Since 1986, the Saudi riyal has been pegged to the USD. The Arab oil embargo of 1973, Saudi Arabia's response to the United State's involvement in the Arab-Israeli war, precipitated events that led to the currency peg. The embargo devalued the U.S. Dollar and led to economic turmoil.

The Nixon administration drafted a deal with the Saudi government to restore the USD to the super currency it once was. From this arrangement, the Saudi government enjoyed the use of U.S. military resources, an abundance of U.S. Treasury savings, and a booming economy saturated with the USD. The riyal was supported by [Special Drawing Rights](https://www.investopedia.com/terms/s/sdr.asp) (SDR), an international reserve asset created by the [International Monetary Fund](https://www.investopedia.com/terms/i/imf.asp) to supplement the official reserves of its member countries with freely usable currencies of IMF members.

Due to high inflation and [the 1979 Energy Crisis](https://www.investopedia.com/terms/1/1979-energy-crisis.asp), the riyal suffered a devaluation, leading the Saudi government to peg the riyal to the US Dollar. The Saudi Arabian Monetary Authority (SAMA) credits the peg for supporting economic growth in its country and for stabilizing the cost of foreign trade.

## Why Would a Country Peg Their Currency?

The most common reasons include encouraging trade between nations, reducing the risks associated with expanding into broader markets, and stabilizing the economy.

## How Many Currencies Are Pegged to the Euro?

In 2024, eleven currencies are pegged to the Euro (EUR), including the Croatian kuna and the [Moroccan dirham](https://www.investopedia.com/terms/forex/m/mad-moroccan-dirham.asp).

## What Is a Soft Peg?

A soft peg is an exchange rate policy where a government allows the exchange rate to be set by the market especially if the exchange rate appears to move in one direction, the central bank will intervene in the market.

## The Bottom Line

A currency peg is a strategy whereby a country's central bank or government sets a fixed exchange rate with a foreign currency or a basket of currencies. A peg's benefits include reducing foreign exchange risk and volatility, encouraging international trade, and promoting economic stability. The potential drawbacks of a peg strategy, especially if badly managed, include the risk of creating trade deficits and affecting purchasing power. Central banks hold large foreign exchange reserves to defend a currency peg. One example of a peg: the Saudi riyal has been pegged to the U.S. dollar since 1986.  
  

> **Article Sources**
>
> 1.  OANDA. "[USD Currency](https://www.oanda.com/currency-converter/en/currencies/majors/usd/)."
>     
> 2.  Bank of International Settlements. "[Foreign exchange intervention in Saudi Arabia](https://www.bis.org/publ/bppdf/bispap73v.pdf)."
>     
> 3.  International Monetary Fund. "[Saudi Arabia: Staff Concluding Statement of the 2022 Article IV Mission](https://www.imf.org/en/News/Articles/2022/06/17/saudi-arabia-staff-concluding-statement-of-the-2022-article-iv-mission)."
>     
> 4.  OANDA. "[Euro](https://www.oanda.com/currency-converter/en/currencies/majors/eur/)."