Fixed Exchange Rate
An exchange rate pegged at a set level, maintained by the central bank through market intervention.
What is Fixed Exchange Rate?
A fixed exchange rate is a currency regime in which a government or central bank sets and maintains its currency's value at a predetermined rate relative to another currency, a basket of currencies, or gold. To defend the peg, the central bank must buy or sell its own currency using foreign exchange reserves whenever market pressure pushes the rate away from the target. Fixed rates offer exchange rate stability and predictability, reducing currency risk for trade and investment. However, they constrain monetary policy independence (as the central bank must prioritize the peg over domestic economic conditions) and can become unsustainable under persistent speculative attack.
Example
Saudi Arabia has maintained a fixed exchange rate of SAR 3.75 per US dollar since 1986, supported by the country's vast oil revenues and substantial foreign exchange reserves. The peg provides stability for dollar-denominated oil revenues and anchors inflation expectations, though it limits the Saudi Central Bank's ability to use monetary policy independently from the Federal Reserve.