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What is Pegging(Peg) In Finance?

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Pegging is a method which is used to fix the values relative to assets of stable value to increase market stability. It is most commonly done in Foreign Exchange for currency pegging in which a government fixes the exchange rate of its own currency to the currency of another country which is viewed as reliable and highly stable. Most countries peg their exchange rate to that of the United States For example, an investor may choose to compare the current value of the United States dollar to the Euro.

pegging

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There are many reasons for taking pegging in practice but one of the major reason is to decrease market volatility, which can be a big concern during periods of economic or political uncertainty. It is not necessary to peg currency values only, nations can also peg to commodities like gold. These commodities tend to have relatively secure prices which make them a safe choice of commodity to peg the value of a national currency to, especially if a nation has reserves of the commodity which can be used to influence the movement of the market. To keep the market growth stable some amount of market intervention is practiced around the world. As economic and political uncertainties can hit the growth of the market. Worldwide, many nations belong to groups of countries which cooperate economically and act as regulators who walk in between, thus have an interest in retaining members with stable economies.

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It is not a full proof method of stabilizing economy as there can be backfire in pegging also. Stable currencies and commodities can sometimes behave unpredictable.

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