Risks and benefits of foreign currency deposit account

You might have seen the full page advertisements for foreign currency deposit account.

This takes place when the saving interest rate and the fixed deposit interest rate in your country are very low.

The foreign currency deposit account highlights the higher interest rate you can get.

The current favorite is the Chinese Yuan deposit account.  You can get much higher interest rate.  If you believe that Chinese Yuan will appreciate faster than your local currency, that is definitely good news.

Everyone knows that China is an economic powerhouse at the moment.

The unknown is the future.

Will China continue to grow at the current rate?  Will China Yuan appreciate at the current rate or even better?

If you are lucky, you get the benefits of higher interest rate and the appreciation of the foreign currency.  For example, the currency appreciates by 5% and the interest rate is at 2%.  Your actual gain is not 7%.  Your actual gain is slightly more than 7%.

For example, you open the foreign currency deposit account with $100,000

A year later, you earned $2000 in interest.  Since the currency appreciation is 5% against your local currency, you get back $107,100.

That is better than putting your money in the local bank, and gain a miserable 0.5% interest rate.

However, investing in foreign currency deposit account is risky.

What if the foreign currency depreciates?

If the gain from fixed deposit is 2%, and the currency depreciates by 3%, you are not making a gain.  You are losing money.

You will have to wait for a longer time to change the money back, or turn the paper loss into actual loss.

In this case, you might as well not open the foreign currency deposit account in the first place.

Most people do not just open a saving account in foreign currency.

They open a fixed deposit saving account, and that locks the usage of their money for at least a year.  The longer the fixed term for foreign currency deposit account, the higher the risk.

Do it only when you have nowhere better to invest.  Do it only when you are certain that your local currency is devaluing at a much faster rate than other major currencies of the world.

Open a foreign currency deposit account only when you do not know how to invest in forex in other ways, and still want to benefit from forex.