A fixed exchange rate is a currency system where a country's currency value is tied or pegged to another major currency, like the U.S. dollar or Euro. This means that the government or central bank maintains the currency's value within a narrow band, providing stability in international trade and investment. To maintain a fixed exchange rate, the government must actively manage its currency by buying or selling it in the foreign exchange market. This can involve using foreign reserves to counteract fluctuations and ensure that the currency remains stable against the pegged currency.