Might this be a good time to jump into foreign-currency CDs and try to earn as much as 14.75 percent on your money?
Yes, according to experts who believe the rising strength of the U.S. dollar may be starting to reverse itself, and thus make foreign currency increase in value.
No, say global CD analysts who suggest you should take a wait-and-see attitude before plunking down your cash to buy New Zealand dollars, Malaysian ringgits, Mexican pesos or some-30-odd other currencies.
One year ago, playing the global CD market was one of the hottest games in town.
The small handful of U.S. banks and thrifts that offer the foreign currency investments were ballyhooing their products like mad, suggesting it was an easy way to double your money.
Then, in July, the roof started caving in on Asian economies, beginning with Thailand. By October the Hong Kong market collapsed and set off a chain reaction throughout the Far East.
Individual investors and banks began moving their funds to the United States, thereby strengthening Uncle Sam’s dollar. That’s why you’ve heard diddly-squat about global CDs lately.
Making sure-fire investments in foreign currencies has always been tougher than throwing three straight sevens in a Mississippi riverboat crapshoot. But it’s possible.
What you’re doing is betting that the value of another country’s currency will rise against that of the dollar. And when you go to cash in your foreign CD, hopefully you’ll get back more ringgits, pesos, yen or marks than you bought in the first place. Simply because the rate of exchange has changed.
And if the exchange rate goes the other way? You lose your interest and maybe even some of your principal.
Take the Mexican peso, for example. Let’s say you invest $20,000 in U.S. money in a Mexican-currency-based CD for one year, at the recently offered rate of 14.75 percent. Based on an exchange rate of 8.4 pesos to the U.S. dollar, that works out to a total of 168,000 pesos.
After one year, because of the 14.75 interest, your investment would grow by 24,780 pesos, or to a total of 192,780 pesos. Your investment would then be worth $22,950 in U.S. dollars. That’s if the Mexican/U.S. exchange rate is the same 12 months from now.
Now for the good and bad.
If the dollar weakens by 5 percent against the peso in the next year (which would make the peso worth more), you’d earn $24,158 (a 20.79 percent return instead of 14.75 percent). But if the dollar gains by 5 percent, your earnings would decline to $21,857 (a 9.29 percent return).
In other words, the more the dollar falls against the foreign currency, the more you earn. Biggest hidden danger? “Currencies can fluctuate very easily,” says Edward Vasquez, manager of Treasury WorldWide in Washington, D.C. (888-456-2323). “In five months the Mexican fluctuation has approached a depreciation of close to 8 percent.”
Between last July 1 and April 1 of this year, Asian currency changes against the U.S. dollar have been even more dramatic–if not shocking. Indonesian currency lost nearly 72 percent of its value; Thailand, 38 percent; New Zealand, 19 percent; and Japan, 14 percent. European currencies lost only a fraction of that, and the British pound actually gained a tad.
Neil J. George Jr., international economist for Mercantile Bank in St. Louis (800-926-4922), thinks the time may be right for U.S. investors. “The dollar is at its peak and is under pressure because of our record trade deficits. We now see central banks and investors starting to pull some of their money out of the U.S. and putting more into foreign markets.”
William Hui, product manager of Citibank MultiCurrency in New York (800-755-5654), is more conservative, cautioning that global CD investing isn’t for novices. “It’s for astute investors with a good eye for the overseas market, and it depends on their risk appetite.”
Both Hui and Mercantile Bank’s George stress the importance of maintaining diversified portfolios. “No one has a crystal ball,” says George. “As markets become cheaper or more expensive, people should rebalance their investments.”
Foreign CD investment minimums are typically $2,500 for a money market account, which gives you daily access to your funds, and $10,000 to $25,000 for CDs of up to one year. Early withdrawals from CDs usually aren’t permitted.
Some banks, such as Citibank and Mercantile, offer full $100,000 FDIC insurance protection on your foreign money investment. But that protects you against bank failure, not the loss of principal or interest if the value of the currency you’ve selected happens to take a hike against the dollar.
– Credit tip. If you want to pay bills quickly and eliminate check writing, electronic banking may be for you. More credit-card issuers and other businesses are accepting this form of payment. Your bank has details.
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Robert Heady publishes Bank Rate Monitor, a newsletter based in North Palm Beach, Fla. You can write to him in care of this newspaper or send e-mail to jrnl8888@aol.com.
