A currency peg fixes one currency’s value to another, most often the US dollar, with the central bank buying and selling to hold the rate. Pegs give exchange-rate certainty but require large reserves to defend, and several currencies Australians send money to are pegged or managed.
A peg is a standing promise. The central bank commits to exchanging its currency at or near a stated rate, and it backs the promise by trading from its foreign-currency reserves whenever the market pushes the price away. The Hong Kong dollar’s long-standing link to the US dollar and the pegs of several Gulf currencies are prominent working examples.
The trade-off is between stability and flexibility. A peg removes day-to-day exchange-rate uncertainty for trade and remittances, but it imports the anchor country’s monetary conditions, and defending it under pressure can consume reserves quickly. History’s currency crises are largely stories of pegs breaking.
Hong Kong’s Linked Exchange Rate System has been in place since 17 October 1983. The Hong Kong Monetary Authority, established in 1993, has run it since then. Under the 2005 refinements the Authority buys US dollars from licensed banks at 7.75 and sells them at 7.85. That Convertibility Zone spans 1.3 per cent, either side of a Linked Rate of 7.80. Multiplying it through a third currency shows how much of it survives. Take a currency worth 0.65 US dollars, meaning one unit buys 65 US cents. Its cross against the Hong Kong dollar works out at 5.07 Hong Kong dollars to the unit. Hold that 0.65 fixed and the full width of the band shifts the cross only between 5.04 and 5.10. Move the 0.65 itself by 5 per cent and the cross moves the full 5 per cent.
For Australians converting money, a peg on the other side of a corridor means the AUD rate to that currency moves almost exactly with AUD/USD.
Longer read: What happened when the Australian dollar was floated. The decision was taken on a Friday afternoon and took effect the following Monday. What it replaced, what the Reserve Bank expected of itself afterwards, and how rarely it has stepped in since.
See the currency converter pages for where this term shows up in practice.
Related terms
Floating exchange rate · Currency appreciation · All terms
Primary authority: RBA explainer: exchange rates. Definition reviewed against the authority’s published material; this page is reference information, not advice.
Common questions
Which currencies are pegged to the US dollar?
Prominent examples include the Hong Kong dollar and several Gulf currencies such as the UAE dirham and Saudi riyal. Many other countries manage their currencies within bands rather than pegging hard, which produces similar but looser behaviour.
What happens when a peg breaks?
The currency jumps to whatever level the market sets, sometimes violently, because pressure that the peg suppressed is released at once. Breaks usually follow sustained one-way pressure that exhausted the central bank’s willingness or reserves to keep defending the rate.
Is the Australian dollar pegged to anything?
No. The Australian dollar has floated since December 1983 and no institution defends any particular level for it. Its steadiest relationships, such as the one with the New Zealand dollar, come from economic ties rather than any formal arrangement.