I understand the exchange rate is dependent on supply and demand of the currency. Some currency like UAE Dirham has been pegged to the dollar for decades. How does that work?
In: Economics
In a pegged exchange rate system, a country’s currency value is directly tied or “pegged” to the value of another major currency or a basket of currencies. This is usually done by the government or central bank. The aim is to maintain stability in international trade by preventing excessive fluctuations in currency values. The pegged rate is maintained through interventions in the foreign exchange market, where the central bank buys or sells its currency to keep its value in line with the chosen reference currency or basket. This system contrasts with a floating exchange rate, where currency values are determined by market forces.
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