A. Peg to a single currency

By pegging the value of a currency to that of a single currency the country facilitates its trade with the country whose currency is used as the peg. Besides, capital flows related to investment may be positively affected by the stability of the exchange rate. Moreover, pegging to a stable currency, like the US dollar, enhances the confidence in the pegging country's currency.

B. Peg to a basket of currencies.

An alternative approach is to peg the currency to a weighted average of several currency values or a basket of currencies. It helps to avoid large swings in its exchange rate with respect to several trading partners' currencies and enables countries to avoid some import price fluctuations. There are several disadvantages, however, of a basket peg. They are connected with technical difficulties of implementing a peg which would in general change on a daily basis vis-a-vis all of the industrial countries. The pegging country may lose attractiveness to foreign investors because there might be more uncertainty about the future value of the country's currency, reflecting the possibility that a basket peg was more open to manipulation, particularly if details of the composition of the basket were not publicized.