Fixed exchange rate

The commitment is operational, not rhetorical. The central bank stands ready to buy and sell its own currency against the anchor at the stated rate, using foreign exchange reserves, so the rate holds for as long as the reserves and the willingness to use them hold. A fix also constrains domestic policy: with an open capital account, the domestic policy rate has to track the anchor economy's rate closely, because a persistent gap invites flows that push the rate off its level. Fixed rate, open capital account and an independent policy rate is a set of three from which only two are available at once.

The arrangement is common in the Gulf. The United Arab Emirates dirham and the Saudi riyal are both fixed to the United States dollar, which is why their policy rates generally follow the Federal Reserve's rather than domestic conditions alone, and why dollar denominated pairs against those currencies show almost no range for long periods. Fixes vary in construction: a hard peg to one currency, a band around a central rate, a basket of several currencies, or a currency board in which the domestic money base is fully backed by reserves.

The thing that most often trips people up is reading a fixed rate as a constant one. It is a policy, and policies are changed and abandoned: a rate can be revalued, devalued, widened into a band or floated, and the quoted price stays perfectly still right up until the day it does not. That pattern also flatters any volatility measure calculated from recent history on a pegged pair, because the measured past contains none of the risk that matters.