Wednesday, April 17, 2024

Soft Pegging

A Soft Pegging describes a type of currency exchange rate system designed to keep its value stable relative to a reserve currency or basket of currencies.

A soft peg is a currency that falls between a fixed or hard peg and a floating exchange rate.

The key difference between a soft peg and a hard peg is that a soft peg provides a limited degree of monetary policy flexibility, allowing governments and central banks to respond to economic shocks.

Soft pegged reserve currencies can be applied in a narrow or wide range. This range is typically revised over time, depending on international inflation rates.

Soft-pegged currencies include the Venezuelan bolivar and the Hong Kong dollar (both pegged to the U.S. dollar).

The Chinese yuan is an interesting soft peg currency because it is soft pegged to the US dollar, but is also considered a reserve currency,

Any type of peg can be vulnerable to a financial crisis, causing a significant devaluation of the currency or even causing institutions to abandon the peg.

Notable examples of such events are the Argentinian crisis in 2001 and the Swiss National Bank’s decision in 2015 to abandon the euro peg.

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