Crawling Peg

By 
WILL KENTON

 
 
Updated Jun 14, 2021
What Is a Crawling Peg?
A crawling peg is a system of exchange rate adjustments in which a currency with a fixed
exchange rate is allowed to fluctuate within a band of rates. The par value of the stated currency
and the band of rates may also be adjusted frequently, particularly in times of high exchange rate
volatility. Crawling pegs are often used to control currency moves when there is a threat of
devaluation due to factors such as inflation or economic instability. Coordinated buying or
selling of the currency allows the par value to remain within its bracketed range.

KEY TAKEAWAYS

 A crawling peg is a band of rates that a fixed-rate exchange rate currency is allowed to
fluctuate.  
 It’s a coordinated buying or selling of currency to keep the currency within range. 
 Crawling pegs help control currency moves, usually during threats of devaluation. 
 The purpose of crawling pegs is to provide stability. 
Understanding Crawling Pegs
Crawling pegs are used to provide exchange rate stability between trading partners, particularly
when there is a weakness in a currency. Typically, crawling pegs are established by developing
economies whose currencies are linked to either the U.S. dollar or the euro. 

Crawling pegs are set up with two parameters. The first is the par value of the pegged currency.
The par value is then bracketed within a range of exchange rates. Both of these components can
be adjusted, referred to as crawling, due to changing market or economic conditions.

Special Considerations 
Exchange rate levels are the result of supply and demand for specific currencies, which much be
managed for a crawling currency peg to work. To maintain equilibrium, the central bank of the
country with the pegged currency either buys or sells its own currency on foreign exchange
markets, buying to soak up excess supply and selling when demand rises. 

The pegged country may also buy or sell the currency to which it is pegged. Under certain
circumstances, the pegged country’s central bank may coordinate these actions with other central
banks to intervene during times of high volume and volatility.

Advantages and Disadvantages of a Crawling Peg

The primary objective when a crawling peg is established is to provide a degree of stability
between trading partners, which may include the controlled devaluation of the pegged currency
to avoid economic upheaval. Due to high inflation rates and fragile economic conditions, the
currencies of Latin American countries are commonly pegged to the U.S. dollar. As a pegged
currency weakens, both the par value and the bracketed range can be adjusted incrementally to
smooth the decline and maintain a level of exchange rate predictability between trading partners.

Because the process of pegging currencies can result in artificial exchange levels, there is a threat
that speculators, currency traders or markets may overwhelm the established mechanisms
designed to stabilize currencies. Referred to as a broken peg, the inability of a country to defend
its currency can result in a sharp devaluation from artificially high levels and dislocation in the
local economy.

An example of a broken peg occurred in 1997 when Thailand ran out of reserves to defend its
currency. The decoupling of the Thai baht from the dollar started the Asian Contagion, which
resulted in a string of devaluations in Southeast Asia and market selloffs around the globe.1

ARTICLE SOURCES

Related Terms

Adjustable Peg Definition

An adjustable peg is an exchange rate policy where a currency is pegged or fixed
to a currency, such as the U.S. dollar or euro, but can be readjusted. 
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How the Linked Exchange Rate System Works
A linked exchange rate system is defined as a method of managing a nation's
currency by linking it to another currency at a specified exchange rate.
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Understanding a Currency Peg and Exchange Rate Policy
A currency peg is a policy in which a national government sets a specific fixed
exchange rate for its currency. Learn the pros and cons of currency pegs.
 more
MUR (Mauritius Rupee)
The Mauritius Rupee (MUR) is the national currency of Mauritius is issued by the
central bank, the Bank of Mauritius.
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Understanding Exchange Rate Mechanisms (ERMs)
An exchange rate mechanism (ERM) is a set of procedures used to manage a
country's currency exchange rate relative to other currencies.
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Pegging Definition
Pegging is controlling a country's currency rate by tying it to another country's
currency or steering an asset's price prior to option expiration.
 more
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