Pegged currency

The currency on the receiving end of a currency peg. The two entries name different things: the peg is the arrangement and its rules, and a pegged currency is what the arrangement is applied to. Several currencies in the Gulf region are pegged to the US dollar, among them the United Arab Emirates dirham and the Saudi riyal, and the Hong Kong dollar is held inside a band under a currency board. Membership of the category is a matter of the regime in force, so a currency can leave it and has.

The behaviour that follows is recognisable before the regime is named. Realised volatility is very low and clusters at the band's edges rather than around a mean. Forward pricing is dominated by the interest rate differential rather than by any expectation of the rate moving. The domestic policy rate tends to track the anchor's, because holding the rate while running materially different domestic rates invites flows the authority would then have to absorb. Dealing conditions follow too: quoted spreads are wide relative to the distance the rate travels, and liquidity thins sharply outside local hours.

The trip is treating that quiet history as a measurement of risk. Low realised volatility describes the defence rather than the currency, and when a peg is abandoned the repricing is sudden and large rather than gradual. Practitioners disagree about whether a pegged pair should carry a risk figure derived from its own price history at all, since the observed series is a record of intervention rather than of a market clearing. What is not disputed is the asymmetry: a defended rate can sit still for years and then move further in a session than in the whole of that record.