Foreign Currency Account: Best way to open one?
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.
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.
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.