What is a Fixed Exchange Rate?

Understanding Fixed Exchange Rates

A fixed exchange rate system pegs a nation's currency to another currency, a basket of currencies, or a commodity like gold. Central banks defend the peg by intervening in currency markets, adjusting interest rates, and maintaining reserve buffers. Traders follow peg regimes closely because abrupt devaluations create seismic moves.

How Pegs Are Maintained

Authorities buy or sell their currency to keep the rate within a set band. They may also impose capital controls or adjust fiscal policy to support the peg. Countries with large foreign reserves and stable macro fundamentals can defend pegs longer; fragile economies eventually face speculative attacks.

Trading Implications

Pegged pairs usually display tight ranges and limited volatility until confidence cracks. Carry trades can thrive thanks to predictable moves, but any sign of reserve depletion, current account stress, or risk aversion can trigger violent breakouts. Always monitor central bank commentary and macro indicators for cracks in the regime.