Every currency has a market-clearing value set by continuous supply and demand — the market pressure slider drags that underlying value up or down, and it drifts there smoothly. What differs is how each regime handles the gap between that underlying value and the official rate.
Under a floating regime there is no official rate to defend: the traded rate simply is the market value, so it glides continuously with pressure — no reserves, no intervention, no crisis point.
Under a fixed regime the central bank commits to holding the rate at the peg. When pressure pushes the market value below the peg, defending it means buying up the domestic currency with foreign-currency reserves — every unit of defense spends the stockpile down. A brief dip is cheap to defend; sustained pressure or a speculative attack drains reserves fast. If the stockpile hits zero, the bank can no longer hold the line: the rate snaps abruptly to the market value in a disorderly devaluation, with a sharp overshoot from the panic before it settles.
gap = peg − marketValue
drain = k1·gap + k2·|pressure| (only while gap > 0)
reserves -= drain·dt
reserves ≤ 0 → abrupt devaluation, peg abandoned
- Market pressure — sustained trade-imbalance or sentiment pressure on the currency; hold it negative to simulate persistent capital flight.
- Speculative attack — a sharp burst of aggressive selling, the classic trigger that empties a reserve stockpile fast enough to break a peg outright.
- Reserve stockpile — the finite war chest a fixed regime spends to defend; a floating regime never needs one.
Real-world relevance: this is the mechanism behind currency crises such as the UK's 1992 ERM exit, the 1997 Asian financial crisis, and countless emerging-market peg collapses — the peg looks perfectly stable right up until the reserves run out.