Fixed Exchange Rate
Plain definition
An exchange-rate system in which a government or central bank pegs its currency to another currency (or a basket) at a set rate and intervenes in the market to maintain it. Hong Kong's peg to the US dollar is a classic example.
In economics
Fixed rates give traders and investors certainty but force the central bank to hold large reserves and surrender independent monetary policy (the 'impossible trinity': a country cannot simultaneously have fixed rates, free capital flows, and monetary autonomy). Speculative attacks can break pegs, as Britain learned in 1992.
Example
Hong Kong's currency board pegs the Hong Kong dollar around 7.8 to the US dollar; the HKMA buys or sells HKD automatically to keep it inside a narrow band.
A 'fixed' rate is not literally frozen: most pegs allow small bands, and governments periodically adjust the peg (devaluation/revaluation). Students often assume fixed means immutable, when in practice pegs are defended -- and sometimes abandoned.