A pegged exchange rate is not a declaration but a standing commitment to buy and sell at a fixed price. What sustains it, and what breaks it, follows from that commitment.
The peg is enforced by transactions
To hold a rate, a central bank must be willing to sell foreign currency whenever the market pushes its own currency down, and to buy when pressure runs the other way.
Selling foreign currency requires reserves, and those reserves are finite. Buying is unlimited in principle, since a central bank can create its own currency without constraint.
This asymmetry means defending against depreciation is fundamentally harder than resisting appreciation, and most peg failures involve the first case.
Interest rates lose their domestic purpose
Capital moves towards higher returns, so a country holding a fixed rate with open capital flows must set interest rates broadly consistent with the currency it is pegged to.
That removes the ability to use rates for domestic conditions. A country in recession cannot cut if doing so would trigger outflows that break the peg.
The available combinations are constrained: fixed rate, free capital movement and independent monetary policy cannot all be held at once, and one must be given up.
Pressure builds through the current account
If domestic inflation exceeds that of the anchor currency, exports gradually become less competitive while imports become cheaper, and the trade balance deteriorates.
Financing that gap requires inflows, and inflows depend on confidence in the peg itself. The arrangement becomes self-referential and therefore fragile.
Markets watch reserve levels for exactly this reason, since falling reserves indicate how long the commitment can be maintained under existing pressure.
Breaks are sudden rather than gradual
Anyone expecting a devaluation gains by selling the currency beforehand, and there is little cost to being early. The incentive to move is therefore strong and one-directional.
Defence involves raising interest rates sharply and spending reserves, both of which damage the domestic economy. There is a point where the cost exceeds the benefit.
The abandonment is usually announced without warning and outside market hours, because any signal in advance accelerates precisely the outflow it would need to survive.
Managed arrangements sit in between
Many countries operate bands rather than fixed points, allowing movement within a range and intervening at the edges, which absorbs shocks without a formal break.
Crawling arrangements adjust the central rate gradually, generally to accommodate an inflation differential, which avoids the accumulation of pressure that fixed pegs experience.
Currency boards go the other way, backing issued currency fully with reserves and removing discretion entirely, which is more robust and correspondingly more rigid.