Countries fixing their currency to another periodically abandon the arrangement under pressure. The difficulty is structural, and it arises from what maintaining a peg actually requires.
A peg is a standing commitment to trade
Holding a fixed rate means the central bank stands ready to buy its own currency when there are more sellers than buyers at that rate.
Doing so requires foreign exchange reserves, and every purchase depletes them. The commitment is only as credible as the reserves behind it.
Markets can observe reserve levels, so a declining stock is itself information that invites further pressure.
Monetary policy becomes an instrument of the peg
Defending a rate usually means raising domestic interest rates to make holding the currency attractive relative to selling it.
Those rates apply to the whole economy, so the defence tightens conditions for domestic borrowers regardless of what the economy needs.
A country defending a peg during a downturn therefore raises rates precisely when lower ones would help, and that tension is what usually breaks the arrangement.
The impossible trinity constrains the choice
A country can maintain a fixed exchange rate, free movement of capital, and an independent monetary policy, but only two of the three simultaneously.
Choosing a peg with open capital markets means surrendering control of domestic interest rates to whatever the peg requires.
Choosing a peg with policy independence requires restricting capital movement, which carries its own costs for investment and trade.
Doubt becomes self-fulfilling
Once traders believe a peg may break, selling the currency becomes a bet with limited downside, since the rate cannot rise far above the peg.
That asymmetry attracts volume, which drains reserves faster and makes the outcome the traders expected more likely.
Defences therefore fail quickly rather than gradually, and the shift from apparent stability to abandonment is often a matter of days.
Pegs persist because they deliver real benefits
A stable rate against a major trading partner removes exchange risk from trade and investment, which matters greatly for small open economies.
It can also import credibility on inflation, since domestic prices are anchored to those of a larger, more stable economy.
Countries therefore accept the constraints knowingly, and many operate managed arrangements that allow limited movement precisely to avoid the rigidity that makes a hard peg fragile.