Certificates of deposit (CDs) are a low-risk way to store your savings for the short term and earn a modest return in the meantime. When you buy a CD from a bank or credit union, you agree to leave your money in an account for a fixed period of time, which can range from a few months to several years. In exchange, the financial institution guarantees you a return on your savings.
The interest rate paid on CDs – and therefore your return – is usually higher than that offered for standard savings accounts. However, the interest rates offered in the United States in recent years have been much lower than those offered abroad. For investors looking for the best possible return on their CD, this can make currency CDs an attractive prospect.
Investing in CDs in a foreign currency is quite possible. However, it’s much riskier than putting your money in a US-based CD. In this article, we tell you why.
Key points to remember
- It is possible to invest in a certificate of deposit (CD) denominated in a foreign currency, ie not in US dollars.
- To do this, you can find a financial institution based in the United States that offers foreign currency CDs, or find a bank abroad that will allow you to open one directly.
- Foreign currency CDs are much riskier than those held in US dollars, as fluctuations in exchange rates can easily wipe out the return you would otherwise have received when the CD matures.
- If you invest with a non-US bank or credit union, your funds are not insured by the US federal government.
Understanding Foreign Currency CDs
There are many countries around the world that offer foreign currency CDs. You can buy a CD in countries with developed economies like Australia or Canada, or in emerging markets like India or Mexico. CDs work pretty much the same no matter where you open them – you agree to leave your money in the account for a set amount of time, and in exchange you receive a percentage return on it.
The yield you receive on CDs is linked to the base interest rate for a given country, which is normally set by the national government. The United States has had a historically low base interest rate (almost 0%) for most of the past five years, and as a result, the yield (i.e. yield) on CDs has also been weak.
Some other countries have a much higher base interest rate, and financial institutions in those countries offer much higher CD yields. For example, interest rates in South Africa are close to 5% in mid-2022, and those in Mexico are 7%.
Higher yields can make these foreign currency CDs seem like a better deal than US-based CDs. However, CDs in foreign currencies are much riskier than those in US dollars. There is a simple reason for this: the exchange rate between currencies. Exchange rates between the US dollar and other currencies can vary wildly and are very difficult to predict. They vary so much, in fact, that fluctuations in the exchange rate can easily wipe out the returns you’ll receive from a CD. To take a specific example, some Mexican CDs pay over 7% interest, but the Mexican peso has fluctuated against the US dollar frequently, even negatively, depending on the year. If your CD matures when the peso is weak, you may even lose money once you convert it back to US dollars.
For many investors, this added risk will undermine the primary benefit of a CD. Certificates of deposit are rated for their low risk and the fact that the funds they contain are federally insured. Foreign currency CDs have none of these features.
There is, however, an important exception. If you have expenses in a foreign currency and don’t need to convert your money back to US dollars, a CD in that currency can be useful. If you own a vacation property overseas, for example, and want to put some money aside to pay for renovations in a few years, you can put it on a CD in that country. You can earn more interest – strictly in local currency terms – than if you kept your money in dollars and only converted it when you needed it.
Foreign currency CDs are much riskier than US dollar CDs. Fluctuations in the exchange rate between currencies can eliminate any return you earn on a CD in a foreign country.
Get a foreign currency CD
However, if you are willing to bear the risk, there are two main ways to get a foreign currency CD. You can either withdraw a CD from a US-based bank that offers foreign currency CDs, or go directly to foreign banks.
As for the first option, you have very limited options. Very few US banks offer CDs in foreign languages, perhaps because of the risks we discussed above. However, TIAA Bank (formerly Everbank) is an exception. Their WorldCurrency CD requires a minimum of $10,000 to open, and they will take up to 1% on currency conversion. In exchange, you get access to CDs in a fairly wide range of currencies and FDIC insurance for your deposit.
The second option – approaching foreign banks and credit unions directly – can be much more complicated and much riskier. Although it is possible to get impressive CD rates by choosing this option, you should make sure you understand the banking regulations of the country in which you want to invest. You will be responsible for converting your money into foreign currency and returning it to US dollars. and your money will not be insured by the Federal Deposit Insurance Corporation (FDIC). Local deposit insurance may be available, but you may need to take legal action in-country if your chosen institution defaults, adding another layer of expense and complexity to your CD investments.
Can I get a CD in a foreign currency?
Yes. If you want a CD in a foreign currency, you can either find a US-based bank that offers one, or go directly to a foreign bank.
Are foreign currency CDs safe?
Foreign currency CDs are much riskier than US dollar CDs due to exchange rate fluctuations. Even though foreign currency CDs can offer higher returns due to higher interest rates, if your CD matures when the US dollar is strong, this event can wipe out your returns and cause you to lose money. .
In addition, funds invested abroad do not benefit from FDIC deposit insurance.
Where can I get a foreign currency CD?
Few banks in the United States offer foreign currency CDs, although TIAA Bank is an exception. You can also approach foreign banks and credit unions directly. Just make sure you understand the banking regulations that govern your deposit.
It is possible to invest in a certificate of deposit (CD) denominated in a foreign currency, ie not in US dollars. To do this, you can find a US-based financial institution that offers foreign currency CDs, or find a bank overseas that will allow you to open one directly.
Foreign currency CDs are much riskier than those held in US dollars. Exchange rate fluctuations can easily wipe out the return you will receive, and if you invest with a non-US bank or credit union, your funds are not insured by the US federal government.