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Foreign Currency Account: Best way to open one?

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October 31, 2009 – Comments (8)

Most Fools understand getting exposure to markets outside the US through equities either based outside the US or with significant business operations outside the US.  But what about currencies?  The Reserve Bank of Australia bumping their target rate to 3.25% recently was a hmmm moment – how do Australian dollar deposit rates compare with the near zero savings and short term CD rates at US banks and how difficult is it to open a foreign currency savings account?  A little Google work turned up the following three possibilities.

Foreign Currency Bank Accounts

If someone in the US wanted a US dollar denominated CD, they would walk in to the bank and buy one.  It doesn’t appear quite that simple for a US resident to open a CD denominated in some other currency.  Search of a few US based bank websites didn’t turn up any information on foreign currency deposit accounts.  National Australia Bank’s FAQ stated, “For NAB Term Deposits and NAB Investment Cash Manager, investors must live in Australia at the time of the account opening.” 

I suspect many banks offer foreign currency savings and deposit accounts, but didn’t find much on their websites.  One exception, EverBank offers deposit accounts and CDs in seventeen different currencies and CDs in several multi-currency baskets. Account minimums are $10000 for a single currency CD, $20,000 for the multi-currency baskets.

Foreign Exchange (FX) Accounts

FX accounts appear to be intended primarily for trading, but they could be used like a savings account in nearly any currency.  An investor could open a US$ account, sell the dollars to buy a different currency and collect the rollover interest.  If no leverage was used, that would effectively create a foreign currency savings account.  Lot size minimums are large, standard accounts trade in lot sizes of 100,000 of the base currency.  Forex.com offers a mini-account that allows trading in 10,000 currency units and FXCM offers a micro lot account with a minimum 1000 unit trade size.  FX accounts offer leverage of as much as 400:1 allowing an investor to make even the full lot size trades with a as little as $250.  However, setting up an unleveraged foreign currency account would require a minimum of $1000 with the FXCM micro lot account or $10,000 with the Forex.com mini-account.  Both offer free practice accounts.

Currency ETFs

This may be the simplest approach for an investor to get foreign currency exposure, it’s also one of the most expensive.  A spot check of ETFs from a few different providers turned up annual expense rates of around 0.4%; investors would also pay brokerage commissions to buy and sell the funds.  The WisdomTree funds invest in US money markets and then enter into currency swaps.  The trade is designed to match money market rates in the target currency.  I didn’t check the other providers, but assume their approach is similar.

ETFs are probably the only option available for investors that don’t have several thousand dollars to tie up. 

Wrap-up

The main purpose of this blog is to start a discussion and hopefully get a little smarter on investing and saving in currencies other than the US dollar.  I’m hoping that those with more knowledge and experience will add some comments or their own blog posts on the subject.  I’m sure I’ve missed a lot and may be off base on using an FX account as a proxy for a savings account.

Nothing here should be considered investment advice or even a pro/con analysis.  I have no relationship with any of the companies mentioned.  As noted, I don’t know what I’m doing and am just trying to get a little smarter. 

Fool on!

Russ

8 Comments – Post Your Own

#1) On October 31, 2009 at 1:08 PM, Sozurmama (22.29) wrote:

Good call Russ, i was looking into this about a month ago. It looked like more of a hassle than it was worth and settled on metals.

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#2) On October 31, 2009 at 2:53 PM, UltraContrarian (31.30) wrote:

Interactive Brokers. You can hold foreign currencies alongside domestic and foreign traded stocks.

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#3) On October 31, 2009 at 4:08 PM, meganchip (88.59) wrote:

Well I don't know what I'm doing either and I'm even less smart than you at this point so I'm at the basic level of trying to understand the reason to invest in foreign currency.

Is it it take advantages of the gains/losses in exchange rates? Is it to take advantage of opportunities in the country of the currency?

Just curious - good stuff! 

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#4) On October 31, 2009 at 5:53 PM, angusthermopylae (39.54) wrote:

Definitely not an expert, but here's one reason:

Let's say you're a citizen in the country of Inflatio.  Your economy is (to you, at least) going rapidly down hill.  You have a strong belief that the currency is going to be worth a lot less, and you have the usual, normal debt that any average Inflationista has.

So, you can a) keep on trucking as prices go up, cutting more and more, hoping that your job will be enough to pay for your continued existence.  Your wages don't go up (or not fast enough), and you get closer and closer to having to choose between paying the mortgage and buying food...or keeping the lights on.

The other option, b), is to bet that some other currency will either hold steady (good) or rise (best) not only against the Inflationi$t, but also against the world's other currencies.

If you choose b), then you take a chunk (or all, if you're a Vegas gambler or psychic) of your money and put in your chosen currency, the Ri$er.

You wait.  If the Ri$er goes up against your currency by 10%, then you now have 110% (basically) more money then you did before.  If it was the payoff for your mortgage, then you can pay off your house, and still have a tidy little sum left over.

It can get better!  If the Ri$er goes up 100%, you pay off your mortgage for effectively half the price...and have more left over.

If the Inflationi$t pretty much collapses (a la Zimbabwe or Turkey in the 90s), then you could effectivly pay off your house with what was a couple of $100 Inflationi$t bills....and the rest if profit.

(Of course, by then, a cart of groceries will  cost as much as a car in the old days, and you'll probably want a good security system well before then.)

(This is also a reason that those who believe big in inflation feel it's ok to borrow big...in the future, that amount of debt will effectively decline ("inflating your way out of debt").  I always wonder if I can get a hit of what they are smoking...or a peek at their crystal ball.)

The bet is that a fixed value of money, taken out of the system now, will be worth more in the future when it's converted back into the system.  Same idea behind stocks, bonds, commodities...but with relative currency values instead of any other yard stick.

 

Don't forget that this can go the other way just as well.  If you're a Riserian who believes that Inflatio is the next emerging market, you might be the other way...and lose everything when your own currency pounds the shilling out of the Inflationi$t.

Think commodities with even less to do with reality--you can win big if you bet the right way (Trading Places), or you can lose evertyhing...all because someone likes/dislikes your currency of choice.

 

*This example isn't my own--there was a great fictional story about the same thing happening in 1920s-1930s Germany.  The protagonist was being egged on to use this kind of maneuvering to benefit from the collapse of the economy and the mark.  As I recall, all was well until the Nazis came along and started shooting people...and our hero was listed as a profiteer.

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#5) On October 31, 2009 at 8:26 PM, rd80 (98.46) wrote:

Sozurmama - It actually looks simpler than I thought when I started looking.  Soft commodities etfs are rising on my research list as an inflation hedge along with metals. The most surprising thing was how high the fees on are on the etfs - seems like currency trading should be pretty cheap for the funds, but I guess not.

UltraContrarian -  Thanks for the lead to IB.  Their name keeps popping up in discussions about good, inexpensive brokerages.

meganchip - The main reasons I'm looking into this are protection against a falling dollar and potential for a higher interest rate return.  I can't take the currency risk of doing it right now, but want to be smarter for when I can do it.

Another significant use I could see is a company hedging against changes in exchange rates when doing business with an overseas firm.  My employer just took a hit on a project because we had a subcontract in a different currency, the dollar weakened against that currency increasing our cost for the work.

Currency exchange also plays a significant role in the carry trade.  Investors borrow in a low interest rate currency, commonly the yen and lately the dollar, exchange it and buy bonds, savings, CDs or other assets denominated in a currency paying higher rates.

angusthermopylae - Nice rundown on how owning strong currencies can help in runaway inflation.

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#6) On October 31, 2009 at 10:11 PM, meganchip (88.59) wrote:

Thanks for the explanations rd80 and angusthermopylae. Very interesting.

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#7) On October 31, 2009 at 11:39 PM, AvianFlu (40.02) wrote:

I don't want to give a big sales pitch but you might want to check into europac.net, which is Peter Schiff's company. I think they are well set up for this sort of thing. You can do your own investigation and make your own decisions.

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#8) On November 02, 2009 at 4:12 PM, kkotwani (99.66) wrote:

I use Interactive Brokers...Ideal and inexpensive way to invest in foreign currencies.

Even for stock trading I love it. I also hold shares of IB.

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