Foreign Currency CDs – Risks and Rewards

March 21, 2012 No Comments »
Foreign Currency CDs – Risks and Rewards

It’s tough out there for income investors looking for bank deposits with attractive rates – at least domestically.

2012, however, may turn out to be quite a rewarding year for foreign currency CD holders. Although these products certainly dont come without risk, they pose as an enticing investment vehicle for a more risk-seeking consumer willing to perform the required due diligence.

With US bank deposits yielding less than the current rate of inflation, many savers are looking more favorably upon these CDs as an alternative.

Before we get into the current yields provided by some of these products, we should point out the major underlying risk associated with them – and that is the fluctuation in world currencies. When a currency rises or falls against the US dollar during the life of your CD this difference will be directly reflected in your earnings - putting at risk even your principal.

For example, if you happen to invest in the Brazilian Reel in 2012 and take advantage of their current 3 month CD yielding 5.09% APY, you will only garner this 5 percent return if the relative value of the US dollar and the Brazilian Reel remain constant throughout the life of the CD. If, for example, Brazil encounters heavy inflation during this period and sees the value of it’s currency sink against the US dollar your earnings will also sink accordingly.

Hypothetical Scenario #1

You invest in a Brazilian Reel 3 month certificate of deposit with a featured APY of 5.09 percent. During this period the Brazilian Reel sinks by 3.0 percent in value against the US dollar. You’re 5.09 percent CD is then only garnering 2.09% in real returns (still a much better yield than what is offered domestically).

Hypothetical Scenario #2

You invest in a Brazilian Reel 3 month certificate of deposit with a featured APY of 5.09 percent. During this period the Brazilian Reel rises by 3 percent in value against the US dollar. You’re 5.09 percent CD is now garnering 8.09% in real returns.

As you probably infer, picking stable currencies is crucial to realizing projected gains, and therefore thorough research should be had before investing in any foreign currency CD.

Check out some noteworthy foreign currency CD rates from countries around the world here.

Also, be sure to visit EverBank and check out updated rates and various currency combination packages.

Related Posts