A pegged currency is a type of exchange rate system where a country’s currency value is fixed against another currency, usually a reserve currency such as the US dollar. This means that the exchange rate between the two currencies remains constant over time. The two currencies are said to be “pegged” together, as the value of one is directly linked to the other.

Perhaps the most well-known example of a pegged currency is the Chinese yuan. In 1994, China adopted a system of pegging its currency to the US dollar at a fixed rate. This allowed China to manage its currency value while keeping the yuan relatively stable. Other countries, such as Saudi Arabia and Hong Kong, have also adopted currency pegs to the US dollar.

Currency pegs can be helpful to a country’s economy, as it can reduce the risk of sharp currency fluctuations affecting their financial markets. On the other hand, pegging a currency to another currency can limit its flexibility, as it is tied to the performance of the anchor currency. This can make it difficult for a country to adjust its exchange rate in order to deal with economic shocks.

In conclusion, a pegged currency is a type of exchange rate system where a country’s currency is fixed to another reserve currency. The Chinese yuan is perhaps the most well-known example of a pegged currency, but other countries such as Saudi Arabia and Hong Kong have also adopted currency pegs. Although currency pegs can be beneficial for countries, they can also limit a country’s flexibility and make it difficult to adjust exchange rates.