Currency peg

A currency peg is a decision by the central bankTermCentral bank×البنك المركزيThe government's bank, which controls the money supply, sets interest rates, and oversees all other banks in the country.Open the term to fix the exchange rateTermForeign exchange×الصرف الأجنبيThe market where one currency is traded for another, at a rate that changes constantly based on supply and demand.Open the term of the local currency against another currency, typically the US dollar. Instead of moving based on market supply and demand, the rate stays at an announced level. The central bank maintains the peg by buying and selling its foreign currency reserves as needed.

The difference between a pegged currency and a floating one changes where the monetary risk lands.

In the Gulf and Jordan, where currencies are pegged to the dollar, monetary policyTermMonetary policy×السياسة النقديةThe decisions a central bank makes about interest rates and the money supply to manage inflation, employment, and economic stability.Open the term arrives from Washington directly: Federal Reserve decisions on interest ratesTermInterest rate×سعر الفائدةThe percentage of principal charged by a lender or paid by a saver, usually stated as an annual rate.Open the term become your rates in effect, and inflationTermInflation×التضخّمA general rise in prices over time, so one riyal today buys less than it did a year ago.Open the term comes with imported goods and rent, not from your own money losing value. The currency itself holds its value, and the risks you price are borrowing and investment risks, not exchange risk.

In Egypt, where the pound floats and devalues, the problem is inverted: monetary policyTermCar insurance×تأمين السياراتA contract that covers the cost of damage to your vehicle or injury to others, depending on the type of policy you hold.Open the term is local, but the currency itself is what loses value. A saving account earning the same nominal return carries exchange risk that does not exist in the Gulf: the balance may climb in numbers, but its value in dollars falls. A bank account that looks safe may be a slow leak.

• A peg holds the currency steady but not the prices: imported inflation reaches you even if the exchange rate stays fixed.
• A peg requires large foreign currency reserves: the central bank needs enough dollars to defend the rate if demand pushes against it.
• Changing a peg (revaluation or devaluation) is rare but consequential: it shifts the value of debts and assets in one move.
• Under a peg, exchange risk moves from individuals to the central bank, which absorbs it on your behalf.