A savings account alternative

Savers tired of earning next to nothing from US bank accounts can look overseas. But there are risks.

It's not exactly un-American to seek a better return by opening a savings account in a foreign currency in this country. It's just difficult.

In contrast with many other countries, it is nearly impossible to find a bank in the United States that offers foreign-currency savings accounts at the consumer level. Yet savers in Hong Kong, for example, can choose among a dozen or so currencies at their local bank branch.

"Only in America do we think only in dollars. But people in most of the rest of the world have a choice of currencies," says Chicago-based personal investment columnist Terry Savage. "Why not follow the smart money?"

Several foreign-currency accounts offer interest rates that are substantially higher than the 2 to 3 percent rate many US certificates of deposit offer. For example, the going rate on New Zealand dollar accounts is better than 5 percent, on Australian dollars, more than 4 percent (see chart).

Add to that any potential gains should the foreign currency rise in value in relation to the dollar, which has been a pretty good bet in recent years. Anyone with Australian dollars last year would have seen the value of his savings appreciate by 24 percent from June to December 2003. That's on top of the interest.

People have many reasons for buying yen, euros, pesos, and dollars of various hues. For example, American exporters need millions in Japanese yen or Thai baht to fund imports, leaning on large banks with international finance departments to serve them. Immigrants also rely on these departments in order to send money back to El Salvador, Mexico, or elsewhere.

Of course, there are online traders who attempt to make quick profits by placing bets on fluctuations in currency values. But experts warn that speculating in foreign currencies is risky, on the order of trading in commodity futures.

For those seeking a simpler approach, there's EverBank.

Responding to a need from its customers - one that most US banks still have not perceived - EverBank began offering foreign-currency accounts in 1986. EverBank started an online banking service (www.everbank.com) in 2000, which makes available over the Internet federally insured certificates of deposit denominated in foreign currencies. "We firmly believe that US savers should have the option to diversify into foreign currencies for various reasons, if they so choose," says Frank Trotter, president of EverBank.

Mr. Trotter gives several reasons for moving into foreign currencies.

One is portfolio diversification. Putting 5 to 10 percent of your savings into a foreign currency is a way to spread risk and a prudent addition to a portfolio of stocks, bonds, or gold, he says. Another reason is a better interest rate along with possible capital gains if the foreign currency appreciates against the dollar.

EverBank offers a range of insured time deposits. An account can be opened for as little as $2,500, but the bank does not pay interest on deposits of less than $10,000. Some baskets of currencies require an even higher initial deposit. EverBank charges a fee to open an account and to convert it back to US dollars when an investor cashes out.

Interest earned from these accounts is subject to federal taxes just like any savings account. Any earnings from currency appreciation are treated as a capital gain when converted back into dollars. Investors can delay paying capital-gains taxes by rolling over gains back into the account.

The reason more US banks don't offer foreign-currency accounts is a chicken/egg situation, says Trotter. Trading in currencies is labor intensive. Banks have to set up special bookkeeping systems to account for the transactions. This makes them think that chasing after nickel-and-dime savings is not worth the cost. That has left the field pretty much open to EverBank. "We've built a niche," he says.

With the US dollar weakening against other currencies, people who held foreign currency accounts in recent years have made money.

Many analysts believe this trend will continue because of the growing trade deficit in the US, huge amounts of dollar reserves piling up in foreign countries, and rising oil prices.

On the other hand, an economic rebound might make the US dollar more attractive again. Fears of terrorism could lead to a flight to the safety of the dollar. If the dollar's value rises, the higher interest from a foreign-currency account might be offset by the currency's falling value.

Saving in foreign currencies carries special risks, warns Joslyn Ewart, a certified financial planner in Ardmore, Pa. There's political or economic uncertainty - look at the meltdown of the Argentine peso, she says.

Investors might be well served to look for accounts that guarantee their principal, says Ms. Ewart. As long as liquidity is not a goal, accounts with guaranteed interest rates - for specified periods of time - may be desirable.

Investors who choose a currency that suddenly goes into free-fall could cash in their CDs early and pay an interest penalty, just as with any CD. Investors can also reduce this risk by sticking to short-term CDs of one year or less and following currency tables in the local newspaper.

Gretchen Steele, vice president for foreign exchange trading at US Bank in Seattle, says her bank offers foreign currency accounts but tends to discourage ordinary savers from investing in them.

"People say you can make a killing in, say, yen, but to do so you have to have a lot of money," she says.

Steve Dinnen contributed to this report.

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