Are foreign currency CD’s a good investment strategy?

January 2, 2009 4 Comments »

I suppose if you’re looking to diversify your portfolio and hedge against a falling US dollar, foreign currency CD’s may be a decent place to start. And although we have a fundamental hang-up (if you will) with this investment strategy, due to the potential to lose a portion of one’s principle, we find them alluring simply because of the high annual percentage yields they provide and the well known fact that our dollar is being overprinted, and thus stands a chance to suffer from future hyper-inflation.

In the US, when we invest or even consider investing in our own country’s bank deposits, our primary attraction to these products is our guarantee from the FDIC that even if our bank fails when our money is deposited with them, we will receive our principle plus promised return on our investment from the FED (currently up to $250k). In contrast, foreign currency CD’s may not have this safe guard of governmental insurance and therefor may take a little more due diligence by the consumer in determining how trustworthy the foreign bank is.

The other fundamental liability in this particular investment strategy is the potential of one to lose a portion of one’s principle if the particular currency invested in suffers losses against the US dollar. For example, while in late 2010, India was offering 9.0% APY on 3 month deposits, had their currency lost more than 9.0% in it’s relative value compared to the US dollar, your investment would have lost you money. Remember you would have needed to convert your US dollar into the Indian Rand before investing in that particular deposit product.

The positive side, however, to the foreign currency CD strategy is that you have the freedom to invest in practically any currency the developed (or even undeveloped) world has to offer. Below is a chart (provided by EverBank.com) displaying the yields of these investments:

3-month South African Rand CD yielding 8.00% anyone?

(*Rates accurate as of 2009. Visit our CD rates center for updated rates.)

3 month 6 month 9 month 12 month
Currency Name Rate APY Rate APY Rate APY Rate APY
Australian Dollar 2.25% 2.27% 2.25% 2.26% 2.25% 2.26% 2.50% 2.50%
Brazilian real 7.50% 7.71% na na na na na na
British pound 0.25% 0.25% 0.50% 0.50% 0.50% 0.50% 0.63% 0.63%
Canadian dollar 0.25% 0.25% 0.25% 0.25% 0.25% 0.25% 0.25% 0.25%
Czech koruna 2.75% 2.78% 2.75% 2.77% na na na na
Danish krone 1.75% 1.76% 1.50% 1.51% na na na na
Euro 0.75% 0.75% 0.75% 0.75% 0.75% 0.75% 1.00% 1.00%
Hong Kong dollar 0.25% 0.25% 0.75% 0.75% na na na na
Icelandic krona 0.00% 0.00% na na na na na na
Indian rupee 6.00% 6.14% na na na na na na
Japanese yen 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Mexican peso 6.00% 6.14% 6.25% 6.35% na na na na
New Zealand dollar 3.50% 3.55% 3.50% 3.53% 3.50% 3.52% 3.63% 3.63%
Norwegian krone 1.75% 1.76% 1.75% 1.76% 1.25% 1.25% 1.25% 1.25%
Singapore dollar 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% na na
South African rand 8.00% 8.24% 8.25% 8.42% na na na na
Swedish krona 0.25% 0.25% 0.25% 0.25% 0.25% 0.25% 0.25% 0.25%
Swiss franc 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

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  • Mitch Chu

    8.24% rate for the South African Rand? Never knew they were experiencing that much growth!! What are the odds you ever see your money again with that one?

  • Steve

    I agree, seems like a hoax. Would be a nice return though. Where would you look to buy these from?

  • Mitch Chu

    Steve,

    You could look into setting one up through http://www.everbank.com, but I would speak to an adviser and see what type of insurance they offer on these rates. They seem to good to be true.

  • xxx

    Notice the APY on it. That’s a fairly decent indicator of currency risk.