A currency peg — the decision to fix one country's exchange rate to another's — is one of the most consequential and precarious choices in economic policy. Pegs offer certainty and stability; they also create fragility and, when they break, they break spectacularly. The history of fixed exchange rates is a history of economic ambition, political pressure, speculative attacks, and sudden reversals that reshape countries overnight.
Why countries peg
Countries adopt currency pegs for several reasons. Small, open economies with large trade sectors benefit from exchange rate certainty: Bahrain, Qatar, and the UAE peg to the dollar because their economies are deeply integrated with dollar-denominated commodity markets. Developing economies with a history of inflation and currency debasement use a peg as a credibility anchor: Argentina's convertibility law (1991–2001) pegged the peso 1:1 to the dollar to break hyperinflation, and succeeded — until it didn't. Transition economies joining the EU often peg to the euro as a step toward eventual eurozone membership, benefitting from the discipline of the ECB's monetary framework before formal adoption.
Speculative attacks: the self-fulfilling logic
Currency pegs are vulnerable to speculative attacks in a way that floating exchange rates are not. If investors believe a peg is unsustainable — because a country's fundamentals (inflation, fiscal deficit, current account deficit, reserve levels) have diverged from the anchor currency — they can bet against it by selling the domestic currency and buying the anchor. This depletes the central bank's reserves faster, making the peg more likely to break, which attracts more sellers. The attack becomes self-fulfilling: the mere belief that the peg will break can cause it to break, regardless of underlying fundamentals. George Soros famously identified this dynamic in 1992 when he shorted the pound against the Deutsche Mark.
Managed floats: the pragmatic middle ground
Most countries today operate neither a pure peg nor a clean float. The managed float — or "dirty float" — involves allowing the exchange rate to move with market forces while the central bank intervenes at the margins to smooth excessive volatility or resist moves seen as misaligned with fundamentals. China's renminbi is the canonical example of a managed float: it moves within a daily band set by the People's Bank of China, tracks a basket of currencies over time, and is subject to regular adjustments reflecting both market forces and policy objectives. This hybrid approach preserves some flexibility while retaining some degree of exchange rate management — occupying an uneasy middle ground in the impossible trinity.