How currency pegs work, and why some exchange rates never move

Most exchange rates move every second the market is open. A few barely move at all. Look up the Hong Kong dollar, the UAE dirham, or the Saudi riyal against the US dollar, and you'll see almost the same number day after day, year after year. That's not a glitch in the data. Those currencies are pegged.

What a currency peg is

A peg is a commitment by a government or central bank to keep its currency at a fixed rate, or within a narrow range, against another currency, usually the US dollar or the euro. The anchor currency does the floating. The pegged currency follows along behind it.

Some examples from the currencies on this site:

• Hong Kong dollar: linked to the US dollar since 1983, and held between 7.75 and 7.85 per dollar since 2005.
• UAE dirham: fixed at 3.6725 per US dollar.
• Saudi riyal: fixed at 3.75 per US dollar since 1986.
• Danish krone: pegged to the euro at a central rate of 7.46038, within the EU's Exchange Rate Mechanism II.

How a central bank holds a peg

Holding a peg takes reserves. If people want to sell the pegged currency and the rate starts drifting weaker, the central bank steps in and buys its own currency using its foreign reserves, soaking up the extra supply. If the currency gets too strong, it does the opposite: it sells its own currency and adds to its foreign reserves.

The central bank also has to keep its interest rates close to the anchor's. If the Federal Reserve raises rates and Hong Kong didn't follow, money would flow out of Hong Kong dollars toward higher dollar returns, pushing on the peg. That's why pegged economies largely give up their own independent interest-rate policy. It's the main price of a fixed rate.

Why countries peg

A stable exchange rate makes trade and investment more predictable, which matters a lot for small, open economies. For oil exporters in the Gulf, whose main revenue is priced in dollars anyway, a dollar peg removes a big source of risk. A peg can also bring in credibility: tying your currency to a stable anchor is a way to import low inflation from a country with a strong track record.

When pegs break

A peg only lasts as long as markets believe the central bank can defend it. When reserves start running low, or when holding the peg requires painful interest rates, speculators may bet that it will break, and that pressure can become self-fulfilling.

History has several dramatic examples. In 1992 the British pound was forced out of Europe's Exchange Rate Mechanism on a day known as Black Wednesday. In 1997 Thailand ran out of reserves defending the baht's dollar peg, let it float, and set off the Asian financial crisis. Argentina's one-to-one peg to the dollar collapsed in 2002 amid a severe economic crisis. And in 2015 the Swiss National Bank abruptly removed its cap on the franc against the euro, sending the franc up roughly 20 percent in minutes.

What a peg means when you're converting money

For practical purposes, a pegged rate is about as predictable as exchange rates get. If you're planning a trip to Dubai or Hong Kong, the rate you see today is almost certainly what you'll see next month. But remember that the pegged currency moves in lockstep with its anchor against everything else. The dirham is steady against the dollar, but it rises and falls against the euro, pound, and rupee exactly as much as the dollar does.

It also makes comparing money transfer services easy. Since the market rate barely moves, any difference between two providers' quotes is almost entirely their markup and fees. You can check each currency's regime on its profile page in the currencies section.