What Is an Adjustable Peg?

In finance, an adjustable peg is a policy that allows one country or region to fix or peg its currency to another country’s or region’s currency. The currency in question usually is pegged to a stronger currency and typically involves money from Europe or America. The adjustable peg usually is changed annually, if not several times a year, allowing the two currencies to come closer together in terms of strength. If the adjustment becomes too much because of excessive growth or lack of growth on one side, then the country’s or region’s bank should correct the peg. The primary reason for pegging currency is to make it easier for one area to export to another.

When an adjustable peg is set, it is very rarely set to a weaker currency, because this would only serve to decrease the pegging area’s currency. Instead, the pegged area generally has a stronger currency and typically is from Europe or America. One reason for this is that these generally are the two strongest currencies in the world. Another reason is because these areas tend to export and import to one another.

To help bridge the gap between two currencies, an adjustable peg will be changed. The timing for these adjustments generally is agreed upon by the area’s main bank and may be several times a year, or it may be based on monetary fluctuations from the pegged area. When an adjustment occurs, it generally brings the two currencies together, making the weaker one a bit stronger each time.

The adjustable peg is only supposed to make small changes, not large ones. For example, if the pegged area is not growing much, then this may result in a large jump in the pegging area’s currency; if the pegged area is growing rapidly, then the pegging area’s currency may drop. Large jumps that occur as a result of these conditions generally violate an adjustable peg’s principles, and the area’s main bank may have to level out the adjustment.

There are many advantages to having stronger currency, but the main reason for an adjustable peg is to help in the exporting and importing relationship between the pegging area and the pegged area, or areas with currency that is similar in strength to the pegged area. The currencies often will become close in strength, so the pegged area will have to pay more for goods imported from the pegging area, which helps the pegging area get more money. Items imported from the pegged area will not cost as much, making it more affordable for the pegging area’s population.