Pegged exchange rate - Definition and Overview

A fixed exchange rate, sometimes (less commonly) called a pegged exchange rate, is a type of exchange rate regime wherein a currency's value is matched to the value of either another currency or to another measure of value, such as gold. As each currency's value rises and falls, so does the other. A currency that uses a fixed exchange rate is known as a fixed currency. The opposite of a fixed exchange rate is a floating exchange rate.

Economists generally think that, in most circumstances, floating exchange rates are preferable to fixed exchange rates because floating rates are responsive to the foreign exchange market. However, in certain situations, fixed exchange rates may be preferable for their greater stability. For example, the Asian financial crisis was ameliorated by the fixed exchange rate of the Chinese renminbi.

Some countries, like China, do not hold to perfectly fixed exchange rates, but rather adopt currency bands. These allow for small changes in the relative value of currency, but prevent large shifts.