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What is a currency peg and how does it impact forex markets?

A currency peg is when a central bank fixes its currency to another, often USD or EUR, to stabilize trade and inflation. Example: HKD is pegged to USD, and Saudi riyal maintains a fixed rate to support oil trade stability. Benefits: reduced volatility, predictability for exporters/importers. Risks: pegs are vulnerable to speculative attacks if reserves are insufficient—famously, the Thai baht peg collapsed in 1997. Institutions trade pegs cautiously, sometimes betting on breaks when imbalances build. Retail traders must avoid complacency, as peg breaks can trigger extreme volatility. Pegs illustrate the tension between stability and market forces in global forex.