Why Not Invest in a Foreign Currency Savings Account or CD?

Foreign Currency Savings Account CD

Have you seen foreign CD rates lately?

Reader Question: My husband are currently using an Capital One 360 Saving Account and getting pretty much nothing.  CD rates in Australia are close to 6%.  What do you suggest for investing internationally? I have dual citizenship in Australia, but I don’t think that matters.

My answer: I’ve noticed the same rates. Very tempting. The main deterrent to doing this is currency exchange risk.

As an example, let’s say you put $5,000 USD into an Aussie bank today. They will make you convert it to AUD. The current exchange rate is .97 (1 USD = .97 AUD).  This means your $5,000 would purchase 4,850 AUD. Unless there is a big currency exchange fee, this wouldn’t be a major problem. You would just let your Aussie dollars grow at 6% and then convert them back over, absorbing the fees.

The problem arises when currency exchange rates change drastically. For instance, if the USD to AUD rate went back to June 2010 levels (just 12 months ago), you would have an exchange rate of 1.18. Therefore, your 4,850 AUD would trade back to USD $4,110 (4850 / 1.18). That’s nearly -16% lost due to fluctuations in currency.

Of course, currency rates could go the opposite direction and exchange at a favorable rate as well, resulting in a bigger gain for you. There’s just no way of knowing what it will do, unless you have some Global Economics degree that I’m not aware of. This added risk is why most people don’t invest their savings in foreign countries.

If, however, you go back to Australia often, it might make sense for you to have some cash there. The risk of currency exchange goes away if you’re certain you’ll be spending the money from the CD there. If you do decide to get a foreign savings account or CD, then be sure to file your FBAR with the IRS.

Other places to get 6% (although not bank level insured, nor liquid): the US stock market and peer lending. You could also find one of those reward checking accounts and get around 4%.

Photo by vagawi 



Last Edited: March 8, 2014 @ 11:03 pm The content of ptmoney.com is for general information purposes only and does not constitute professional advice. Visitors to ptmoney.com should not act upon the content or information without first seeking appropriate professional advice. In accordance with the latest FTC guidelines, we declare that we have a financial relationship with every company mentioned on this site.
About Philip Taylor

Philip Taylor, aka "PT", is a CPA, financial writer, FinCon CEO, and husband and father of three. He created PT Money back in 2007 to share his thoughts on money and to meet others passionate about managing their finances. All the content on this blog is original, and created or edited by PT. Read more about Philip Taylor, and be sure to connect with him on Twitter, Facebook, or view the Philip Taylor+ Google profile.

Comments

  1. Interesting post. Great things to consider for sure.

  2. michael lee says:

    I think it is smart to move at least a portion of your assets out of the USD. The feds are printing way too much money. Raising the debt ceiling yet again is just another lisence to print more money thus devaluing the dollar even more.

    My girl friend and I have moved 90% of our liquid assets into the RMB to take advantage of the appreciation. We only keep enough here in the states for day to day living expenses

  3. Nice post