This is an example of a Pegged exchange rate.
What is meant by Pegged exchange rate ?
- An exchange rate stabilization strategy known as a currency peg involves a national government or central bank setting a fixed exchange rate for its own currency with a foreign currency or a basket of currencies.
- A currency peg is a policy in which the government or central bank keeps the value of one currency fixed in relation to another country's currency, therefore ensuring a stable exchange rate between the two.
- For instance, before 2015, China's currency was linked to the US dollar.
- A floating exchange rate is set by the supply and demand of the private market. A fixed rate, often known as a pegged rate, is the official exchange rate set and maintained by the government (central bank).
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