What is a Crawling Peg?


Welcome to the Investors Trading Academy talking
glossary of financial terms and events. Our word of the day is “Crawling Peg”
A crawling peg is a system of exchange rate adjustment in which a currency with a fixed
exchange rate is allowed to fluctuate within a band of rates.
The procedure in which a currency’s exchange rate is periodically adjusted, usually to
counter the effects of inflation. The exchange rate remains fixed between one change (crawl)
to the next. The par value of the stated currency is also
adjusted frequently due to market factors such as inflation. This gradual shift of the
currency’s par value is done as an alternative to a sudden and significant devaluation of
the currency. For example, in the 1990s, Mexico had fixed
its peso with the U.S. dollar. However, due to the significant inflation in Mexico, as
compared to the U.S., it was evident that the peso would need to be severely devalued.
Because a rapid devaluation would create instability, Mexico put into place a crawling peg exchange
rate adjustment system, and the peso was slowly devalued toward a more appropriate exchange
rate.

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