The Search for Higher Rates - Foreign Currency CDs

In this discussion forum thread yesterday I posted a link to an article that gave an overview of 8 investments for those looking for an alternative to bank CDs. These will likely provide higher yields than what traditional bank CDs provide in today's awful interest rate environment. As I mentioned in the forum thread, all but one have risks.

There is one additional investment that wasn't mentioned. It's actually a bank CD, but it offers much higher yields. It's FDIC-insured, BUT there is a risk of loss. It's the WorldCurrency CDs offered by EverBank. These are foreign currency accounts that are denominated in a foreign currency. These can offer a high yield along with a chance of appreciation if the dollar falls. However, there is also the risk of a loss of principal due to changes in currency exchange rates. It can be confusing to think that an FDIC-insured account may have a loss of principal. Here's what EverBank states in its small print:

FDIC insurance covers against loss due to the failure of the institution, but not fluctuations in currency values. Due to the nature and volatility of the foreign exchange market, the values of currencies are subject to wide fluctuations against the U.S. dollar and investments in foreign currency denominated instruments will entail significant risk exposure to adverse movements of the foreign currency relative to the U.S. dollar.

I described many details of these Currency CDs in this 2007 EverBank post which included an interview with an EverBank VP.

These WorldCurrency CDs was very appealing until the 2008 global financial crisis. The CD rates varied by country, and one of the countries that had the highest rate was Iceland. The risk/reward principle hit home on this one. Iceland's financial crisis appears to have caused these CDs to experience a major loss. Hans at OpenMarket described the loss he experienced and how it seemed to be more than what should have been expected.

Not all countries have CDs with attractive yields. However, there are a few with yields higher than what you can get here in the U.S. Below is a list of the best 3-month WorldCurrency CD yields listed at EverBank as of 8/25/2011:

• 3.03% APY - Australian dollar
• 4.84% APY - Brazilian real
• 3.55% APY - Indian rupee
• 3.68% APY - South African rand

The above countries are much larger than Iceland so I would think there would be less chance of experiencing the loss that investors experienced with Iceland CDs. But there's no guarantee.

One note about these CDs is that there is a currency conversion fee when the funds are converted into U.S. dollars. However, if you let the CDs automatically renew, there is no conversion fee. So this fee shouldn't have a major impact if you use these CDs as more of a longer-term investment.