6% CDs: Look Cautiously Overseas
Think that foreign-currency CDs are safe bets for chasing higher yields?
Think again. These certificates of deposit can offer mouthwatering rates -- up to 6%. But they're pegged to foreign currencies that can slip and slide unexpectedly. As you consider making foreign-currency CDs part of your portfolio, understand the risks and rewards, and follow Bankrate's tips for protecting yourself.
Foreign-currency CDs are issued in currencies such as Indian rupees, Brazilian reals or euros. The CDs are exchanged for dollars so the buyer can invest in the CD. Then, they are converted back to dollars when the CD matures.
But there are currency exchange risks when you make the conversion back to U.S. dollars. A strengthening dollar can wipe out your return.
"That's a big impact. And the currency markets have become more volatile," says Walid Petiri, president of Financial Management Strategies LLC in Baltimore.
Given these risks, Petiri advises investors not to consider foreign-currency CDs as safe as traditional CDs. Instead, think of them as "enhanced fixed-income replacements," because you can get higher total returns than regular CDs.
Of course, there are solid benefits for investors who don't mind risk. If a foreign currency spikes against the dollar, you'll nab a higher total return than on traditional CDs. And that higher rate also is guaranteed.
They also are readily available. You can buy foreign-currency CDs via overseas banks or banks in the U.S.
Foreign-currency CDs help diversify your investment portfolio, says Chuck Butler, president of EverBank World Markets division.
"These CDs provide a hedge if the dollar depreciates," he says. The dollar has been weak for more than eight years, enhancing the value of foreign-currency CDs.
Another benefit is that Americans with overseas obligations can buy foreign-currency CDs timed to their payments, Butler says.
Jeff Sica, president and chief investment officer at Sica Wealth Management in Morristown, N.J., says investors in foreign-currency CDs must grasp what makes the currency strong, including an understanding of complicated government policies that affect currency fluctuations. That means scrutinizing a country's monetary policies, too.
"Foreign-currency CDs are the worst investments for novice investors ," Sica says. "They could be annihilated when the dollar's fall reverses."
To protect your investment, make sure you follow these three rules.
Foreign Currency Cd - News
The twist is that CDs in highly volatile foreign currencies usually pay the highest interest rates. Sica says when buying the highest-interest foreign-currency CD, you're risking a greater likelihood of declines. "Don't be a yield chaser," he says.
The CCI said that its probe found "a clear intention on the part of NSE to eliminate competitors in the relevant market [currency derivatives]." It also said that NSE intended to acquire a dominant position in the CD segment by cross subsidising this
new business initiatives, investments and operations in foreign jurisdictions, foreign currency fluctuations and IMAX's prior restatements and the related litigation and investigation by the SEC and the ongoing inquiry by the OSC.
Mitigating the added currency risk of many higher yielding foreign government bonds has been a US dollar that has continued to weaken as a result of increased debt concerns. As a result, a greater number of investment grade bonds denominated in diverse
Some taxpayers busted by the IRS have argued they figured they still had a US-based account, not a foreign account. When the IRS asked why they didn't report the annual income on the CD, some have argued it was non-taxable since it was only accrued and
Why Not Invest in a Foreign Currency Savings Account or CD
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%.
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