How to Invest in Foreign Currency
By Eric Hammer
If you want to invest in foreign currency holdings, which
are distinct from the better known Forex market, it’s really
not a very different experience from purchasing government bonds
or opening a bank account in the United States. The key point
with this is that you may need to have significant assets if
you want to invest directly and you need to be able to research
foreign currency holdings to understand if it’s a good deal.
Consider for example the Greek and Irish markets and the euro
zone as a whole. Rather than engaging in Forex trading in the
euro zone, you might instead purchase euro denominated bonds
in European countries (more about Greece and Ireland in a moment).
Thus, you are basically buying and holding assets in foreign
currency rather than making in and out purchases as most Forex
traders do.
Now, the catch is that, as is the case with Greece and Ireland
(we mentioned those two countries for a reason), the banks and
the government in both of those countries have run into problems
of late and may have trouble paying back loans made to them.
So far, the rest of Europe (mostly Germany, though to a lesser
extent, the UK and France as well) have been busy trying to bail
out their southern friends because they know that allowing these
countries to collapse financially could hurt them even worse
than simply extending more credit and handing them additional
bailout money.
However, as someone who wants to invest in foreign currency,
you need to keep in mind that you can lose your investment, sometimes
more easily than investing here at home because you are not there
on the ground to see what’s going on and if you don’t
pay careful attention to exchange rates, which can fluctuate
wildly.
How Much Can You Make?
Thinks of this as being not very different from working in
the bond market or opening a CD here in the United States. People
do make millions of dollars by investing in foreign currency,
however people also lose millions of dollars by doing so. The
safest bet is usually (though not always) sovereign debt, meaning
debt to governments (i.e. bonds) or domestic banks that offer
foreign currency CDs.
Were you to have invested in Greek government bonds for example,
before the bailout took place, you might have been offered 10%
interest on your money. The catch of course is that Greece went
bankrupt, though they were propped up by the European Union.
Generally, expect to earn returns similar to those you might
for investing domestically with some possibly higher returns
when economies show signs of rapid growth.
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As previously noted, this is not the sort of thing you want
to be doing with your $1,000 life savings. If you have hundreds
of thousands of dollars or millions to invest, then you may very
well want to try to invest in foreign currency. The safest way
to do so, though it will give you the least amount of return
on your money is to open a foreign bank account (like a Swiss
bank account) or a domestic bank account denominated in a foreign
currency. Remember again that bank accounts for foreigners are
not intended for the person with a few hundred or even a couple
thousand dollars. They are intended for those with serious amounts
of money that they would like to invest overseas. Bank accounts
at domestic banks which are delineated in foreign currency may
have smaller thresholds, though they still typically will require
investments in the tens of thousands of dollars.
Keep in mind also that even if you invest in a foreign currency
CD from a domestic bank such as Everbank, you can still lose
money. These CDs are FDIC insured, however since they are delineated
in a foreign currency, the value of your investment vis a vis
the dollar will fluctuate. If you choose to invest with a bank
overseas or if you choose to purchase foreign stocks or bonds,
then you can potentially lose everything since you don’t
even have FDIC insurance.
Qualifications / Requirements
There is no formal training required to do this, however it
helps to have a background in finance, mathematics or statistics.
The main requirement is that you are well educated about foreign
markets and that you are prepared for the risk involved in investing
overseas.
First Steps
Start by reading everything you can about foreign investing.
Then read some more. The better you know a foreign country the
more likely you are to do well. Then, consider contacting places
like Everbank where you can open CDs delineated in foreign currency.
If you want to go all out, consider looking at banks in foreign
countries and open an account overseas, again, if you have the
money to do so.
Resources
Everbank
– An American, FDIC insured bank that offers CDs delineated
in foreign currency. The money is FDIC insured, but you can still
lose money because the exchange rate may change.
Bankrate: A Little Foreign Change in Your Portfolio?
– A good analysis of why you may wish to invest in foreign
currency and what the risks involved are.
MoneyNing: Four Ways to Invest in Foreign Currency
– An excellent article showing you different ways of putting
your money into foreign currency.
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