Currency peg definition

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A currency peg is a governmental policy of fixing the exchange rate of its currency to that of another currency, or occasionally to the gold price. It can sometimes also be referred to as a fixed exchange rate, or pegging.

Maintaining a currency peg requires a central bank to monitor supply and demand, releasing or restricting cash flow in order to ensure that there are no surprising spikes in demand or supply. When the actual value of a currency no longer reflects the pegged price that it is trading at, problems arise for central banks who have to work against excessive buying or selling of their currency by holding huge volumes of foreign currency.

Currency pegs can play a big part in forex trading by artificially stemming volatility.

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