Pegging of a currency to another currency means that the two are now joint and will move together, these will not be traded against each other, they will not face any fluctuation and their conversion would be smooth.
In Pegging a currency’s value is fixed to either the other currency or a basket of currencies or other measure of value such as gold.
The maximum 0.001% variation in the exchange rate can be seen over a period for the international foreign exchange market calculations and their trade.
This is a great tool to hedge your currency against all global turbulence if you peg it against the stronger currencies. Pegging also allows the importers and exporters to know exactly what kind of exchange rate they can expect for their transactions, simplifying international trade. This in turn directly help to curb inflation and temper interest rates, thus allowing for increased trade.
The history of currency pegging goes back to the world war II, when America had suddenly overpowered the entire world by use of the nuclear bomb in the two cities of Hiroshima and Nagasaki. The world was shocked and in the state of depression, everybody was looking for solace and peace was sought across the globe.
Global economy was highly vulnerable, Germany surrendered with heavy fine and Hitlers climax was reached with many millions dead and dislocated. This was the time when America, through its enormous power and authority abolished Gold Standard system (an old system where the country’s wealth or currency was according to its gold reserves) and introduced its currency as a replacement.
International Monetary Fund was established and gold was replaced with dollar as official reserve asset. This new regime was intended to combine binding legal obligations with multilateral decision making through the international monetary fund (IMF).
This was the time when the smarter small economies pegged their currencies with the stronger currencies, Dollar being the front runner and the first choice.
UAE Dirham (AED) was tied up with USD at an exchange rate of 3.67 and is now a global currency, equally profitable to hold and preserve as dollar, easily accessible and convertible across the globe and giving full value preposition to the holder.
This pegging has helped UAE grow from a small dessert state to a full blooming center of central Asia’s trade. The development and growth of its cities like Dubai and Abu Dhabi, the infrastructure and international fund flow etc is all because pegging means security and investors like this fact.