Exchange rates determine how trading is conducted between two different currencies. Usually, exchange rates fluctuate, depending on certain factors in the foreign exchange market. If these currencies are governed by a fixed exchange rate, however, the rate at which trade is conducted does not change, even if the said factors do change.

Foreign exchange is an area which is used for a number of purposes. For investors, the trade of one currency for another is a way by which profits can be made. Another common reason for trading one currency with another is the need to conduct business or reside in a territory which makes use of the other currency. If the currencies involved are subject to a floating exchange rate, then it means that the party who wishes to trade one currency for another will get a different amount of the desired currency every time he conducts a transaction. On the other hand, if the exchange rate is fixed, then no adjustments are made, even in the event of market fluctuations. The party trading currencies is therefore aware of how much he will be getting for every transaction. It is, however, also possible for fixed exchange rates to be completely removed.

A fixed exchange rate is also referred to as a pegged exchange rate. This term is particularly apt because under this arrangement, one of the currencies is usually pegged on a much stronger currency. The US dollar is one example of a currency on which some pegged currencies depend.