How Currencies are Pegged (Fixed Foreign Exchange Rates)

This is a continuation of my initial entry to address questions posed by Fariehaz in an earlier article on FOREX trading.

As usual, I’ll keep it simple. I won’t get into too much details.

First of all, currency peg means fixing the exchange rate of one currency against the other (contrast with floating exchange rates). For example, the Malaysian Ringgit (MYR) was pegged with the US Dollars (USD) at 3.800, after the Asian financial crisis.

So, how is a currency pegged?

If one country decides to peg its currency against another currency, the government will be the major player in this. The government will be the one buying or selling its own currency in the market to manipulate the rates.

Here’s how it works.

If the exchange rate is depreciating below the desired rate, it will buy its own currency in the market, to drive the rates up again.

If the exchange rate is appreciating above the desired rate, it will sell its own currency, pressuring it to go down again.

This is how currency pegs are usually maintained. It’s all supply and demand baby!

Another way is for the governments to make it illegal for its currencies to be traded against the pegged currency, at other than the desired rate levels. China did this once.

So there you go, a basic explanation of how currencies are pegged.

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Disclaimer: This article is not a specific nor general advice on managing or investing your money. This article does not constitute a recommendation nor does it take into account your investment objectives, financial situation nor particular needs.

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About nadlique

This blog is about the journey of a 28-year-old Malaysian towards financial freedom. This blog was started back when the blogger was 21 years old. However, his journey towards financial freedom had begun way before that. Materials such as investing, business, entrepreneurship, equities, and real estate are presented. The author also posts his thoughts and observations on life in general.

Comments

  1. Ok, this is simply enough to understand. Peg is a new term I learn today. Thanks.

  2. Amanda Kelly says:

    Hello webmaster! I am thoroughly impressed with your knowledge of Malaysia Forex Rates. Your insights into this article about Malaysia Forex Rates was well worth the the time to read it. I thank you for posting such awsome information. Signed Amanda Kelly on this Day Monday.

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