dollarpegged

A dollar-pegged currency is one whose value is fixed to the United States dollar or kept within a narrow band relative to it. This exchange-rate regime is a policy choice made by a country’s central bank or monetary authority to stabilize the currency’s value against the dollar.

Implementation can take several forms. A hard fixed peg is maintained through continuous intervention and, in some cases, a currency-board arrangement that issues local currency only when backed by equal or greater foreign-reserve assets. More flexible arrangements, such as crawling or adjustable pegs, allow the local currency to track the dollar with small, deliberate adjustments. In practice, central banks intervene in foreign exchange markets to defend the target rate and manage liquidity.

Rationale and effects: The peg aims to stabilize inflation, anchor expectations, reduce currency risk for trade and investment, and provide credibility in economies with volatile histories or shallow financial markets. However, it reduces monetary policy autonomy, requiring alignment with U.S. monetary policy, and can demand large foreign-exchange reserves to defend the peg during external shocks or capital movements.

Common examples include currencies that maintain a dollar peg or are tightly linked to the dollar, such as the Hong Kong dollar, the United Arab Emirates dirham, the Saudi riyal, the Bahraini dinar, and the Omani rial. Some Caribbean currencies, including the Bahamas dollar and the Eastern Caribbean dollar, also operate with dollar-linked pegs.

Risks and dynamics: Pegs can fail under heavy speculative pressure or persistent misalignment with the underlying economy, potentially triggering abrupt devaluation or a transition to greater exchange-rate flexibility. Authorities periodically reassess the peg, adjust bands, or move toward a more flexible regime.