← Back to Glossary

currency peg

It’s when the value of one country’s currency is directly tied to the value of another country (or a basket of other currencies). So, for example, 3.75 Saudi Riyal is always worth 1 US dollar. That’s a hard peg. A “soft peg” is when a currency is allowed to trade within a set level of the peg. For example, China’s renminbi works as soft peg: each day the Chinese government sets a price point relative the US dollar and the renminbi is allowed to trade to trade within 2% of that price point. The Chinese yuan peg that is set each day against the dollar is, however, based on the value of a basket of currencies that includes the US dollar but also uses the value of the Yen, Euro and Pound. Both hard and soft pegs often require the country setting the peg to do foreign currency trading in order to protect the peg. That means that if lots of investors are selling the Riyal, then the Saudi government will buy the Riyal and sell its holdings of US dollars so that the peg remains the true exchange rate.

Grow your business
with Finimize

Our Partners