Foreign Currency CDs Can Help Protect Your Savings From The Falling Dollar

As I was nosing about the internet last night, I came across Everbank’s World Currency Index CDs, which I hadn’t heard of before.  These appear to be a spin-off of Everbank’s popular Foreign Currency CDs, which let you buy a CD in a foreign currency and earn local interest rates.  For instance, prevailing interest rates in Icelandic Kronas are currently 8.63% for 3 months while Australian Dollar-denominated CDs pay 5.25% for a 12 month term.  The problem with these CDs is that they were always too speculative:  you had to basically make a concentrated bet on just one or two currencies relative to the dollar and hope you were correct.  Predicting currency fluctuations is difficult for the experts and nearly impossible for the individual.  And since the minimum for most of these foreign currency CDs is $10,000, not many people could afford to diversify that risk away effectively.

A Foreign Currency Mutual Fund

Everbank’s World Currency Index CDs, on the other hand, are diversified along a specific motif.  For instance, the commodity CD is invested equally in the money markets of four countries whose economies are closely tied to raw materials like wheat, cattle, gold, copper, oil, or other commodities (Australia, New Zealand, Canada, and South Africa).  This CD currently pays 5.32% for a 6 month term and should do quite well in periods of high inflation.  Plus, since the principal is FDIC insured (from bank failure, not from currency fluctuations as I’ll get to in a moment), they are probably a lot safer than investing directly in commodities.  There is also a World Energy CD (currently paying 3.02% for 6 months), which invests equally in the British Pound, Austalian Dollar, Canadian Dollar, and Norwegian Krone.  While the minimum of $20,000 is still a bit high, it is low enough to be useful to many individual investors as part of an emergency fund or an intermediate-term goal such as a downpayment for a home or a new car for somebody concerned the falling dollar will lead to increasing domestic inflation.

Caveat Emptor

It is important to note that the principal in these CDs are insured ONLY against failure by a member bank and not against currency fluctuations.  That is, if one of the banks the fund is invested in defaults on its debt obligations, you will be compensated by the FDIC;  however, if the value of the dollar rises relative to the basket of currencies your CD holds, you will NOT be compensated for your loss.  You should carefully consider the dangers of investing in a foreign-currency CDs before investing and should obviously not put all your eggs in one basket.  At most, I would invest 20-25% of my short-term cash reserves in these foreign currency index CDs as a hedge.  Realistically, if you stick to 3-month terms, the risk of principal should be minimal but there is a significant possibility of losing money, unlike dollar-denominated CDs with which you are probably more familiar.  Think of this as yet one more tool in your financial toolkit.