For those who are worried about the future of the US dollar, bank accounts denominated in a foreign currency might look appealing. EverBank has long offered foreign currency bank accounts. I can't say if these bank accounts would be a better investment than owning foreign currency ETFs. Also, there are other ways to hedge against the dollar such as owning foreign mutual stock funds. When you're considering alternative investments, this Orlando Sentinel article warns against buying into the next "hot investment". It gave an example of a reasonably way to invest in foreign currencies:
in a conventionally aggressive portfolio that is 90 percent stocks and 10 percent bonds or cash, investors could place maybe 10 percent of their "stock money" in mutual funds or exchange traded funds based on precious metals, oil or other commodities or foreign currencies.
Last week we saw one of the important risks with foreign currency investments: a strengthening dollar. Even though EverBank's Foreign Currency CDs are FDIC insured, there's no insurance against loss from currency price fluctuations.
The best example of currency risk happened in 2008 when some EverBank customers had major losses on their EverBank Icelandic Krona CDs. This was when Iceland's financial markets crashed. One customer described his loss in this blog post at OpenMarkets.org. He reported that his CD was closed early and the bank converted the CD from Kronas into dollars at an exchange rate that was very unfavorable.
Another issue with these foreign currency CDs is the cost of the currency conversions. Here's what EverBank states regarding this:
Currency exchange rate will generally be within 1% of the Market Rate that EverBank determines in its judgment to be available for that particular currency at that time.
It should be noted that you can let the CDs be rolled over in the same currency without conversion costs. So if you keep the CDs for several years, this currency conversion cost has less impact.
With these risks and downsides in mind, there are some benefits. In addition to the gain from a falling dollar, interest rates are much higher. EverBank offers some foreign currency CDs with interest rates much higher than what you can get with U.S. bank CDs. Below is a sample of some that are listed at EverBank's WorldCurrency CD page.
Rates as of 5/9/2011:
- Australian dollar 12-month CD: 3.63% APY
- Brazilian real 3-month CD: 3.03% APY
- Indian rupee 3-month CD: 3.55% APY
- South African rand 6-month CD: 3.68% APY
Choosing currency accounts from larger countries and not limiting accounts to one currency can help reduce risks. That's why EverBank offers the WorldCurrency Basket CD. I did a review of this World Currency Basket CD a few years ago.
There are other banks that offer foreign currency bank accounts. I reviewed a few of these in this January blog post.