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An adjustable peg is a type of currency peg where a currency is pegged to another major currency, usually the US Dollar or Euro, but the peg allows for some fluctuation around the set level, and the acceptable limit of this fluctuation is regularly revised. This allows central banks to respond to changing economic conditions without officially abandoning the peg. An adjustable peg is considered a preliminary step towards a full float of a currency. For this reason, it is sometimes referred to as a dirty float.
A crawling peg is a closely related term where a currency trades in a narrow band around its fixed currency. This band may or not be adjusted frequently. Where it is, the crawling peg is also an adjustable one. All of these practices provide ways for policymakers to strike a balance between maintaining a strict currency peg and free-floating currency markets. Adjustable pegs first appeared following the introduction of the Bretton Woods system in the 1940s and have remained a feature of certain currency markets to this day, usually – but not always – in smaller, exotic currencies.
If a currency peg is maintained, fluctuation in price will be limited to a certain range. That means there are fewer opportunities for volatility-seeking FX CFD traders in fixed markets than free-floating ones, but it is still possible to trade pegged currencies. When a peg is suddenly abandoned, it can cause extreme volatility. This can happen without any warning, as in the case of the Swiss franc scrapping its peg to the Euro in 2015.
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Investing in CFDs involves a high degree of risk that you will lose your money due to the use of leverage, particularly in fast moving markets, where a relatively small movement in the price can lead to a proportionately larger movement in the value of your investment. This can result in loses that exceed the funds in your account. You should consider whether you understand how CFDs work and you should seek independent advice if necessary.
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