EverBank Financial of Jacksonville, Fla. offers depositors CDs in 15 currencies and overnight accounts in 18. Don't expect a handsome interest rate. Five of the most promising foreign CDs, say EverBank officials, have interest rates below the 5% you can get on a one-year CD in the U.S.. In fact, the Swiss CD offers no interest because that small, perennially neutral European nation, a traditional haven of capital and an icon of stability, is seen as the epitome of safety.
EverBank has gathered up $900 million for its foreign currency accounts, which are protected by deposit insurance. EverBank's spread of 0.75% is less than one percentage point from the midpoint of the institutional bid/ask spread for your purchase and selling prices.
Tax treatment: Your net interest is taxable as ordinary income. Gains or losses on converting the CD back into dollars are capital gains and losses, eligible for the 15% federal rate if the CD is held for at least a year and a day. (EverBank's one-year CD does qualify as long term.)
Charles Butler, president of EverBank World Markets, is a fan of the
Swiss franc. It has climbed 5% against the dollar since April and
historically does well during dollar panic: It was up 20% in 2002, a
post-Sept. 11 reaction. Like the European
The Swedish krona one-year CD carries a yield of 0.75%. But inflation in Sweden is only 1.6%, and the central bank is determined to keep it low.
If you want a speculative play, buy Mexican pesos for a yield of 4.8%, at some risk that this historically shaky currency will suffer a collapse before you can get your dollars back. The peso was the subject of large devaluations in 1976 and 1994. One worry: What will happen if and when oil prices drop, says David Watt, senior economist at BMO Capital Markets. He expects the peso to rise 2% against the dollar this year but to recede again in 2007, along with oil.
Aside from certificates of deposit, there are several mutual funds that track multiple currencies. They run up annual expenses of $1.19 to $1.30 per $100 of assets. Six country-specific exchange-traded funds that Rydex just launched in late June will have expenses of 0.4%. Rydex has had a euro ETF in place since December 2005.
For those seeking Asian exposure, an alternative is currency notes,
trading like a preferred stock on the American Exchange, from
If you have a lot of bucks, consider holding currency futures on the Chicago Mercantile Exchange. The British pound contract, for example, is a bet on $114,000 worth of the currency. To avoid the risk of a margin call, deposit that entire sum in your futures account in the form of Treasury bills. You collect 5% interest on the bills plus a gain or loss on the pounds. The round-trip commission on a single contract might be $7.20; the bid/ask spread another $12.50. Another broker quoted $33 for the commission plus the bid/ask spread. Gains on the future are taxed at a blended rate of a maximum 23%, says Robert A. Green, a CPA, in New York, specializing in taxes for traders and hedge funds. In selecting a maturity, you have a tradeoff between liquidity (lots of contracts outstanding) and the cost of rolling over frequently. For the best liquidity, David Schulz of the Chicago Merc recommends selecting a maturity three months out.
Beware of currency charlatans. John Bartowski, a high school
principal from Moses Lake, Wash., invested $5,000 with something called
Gibraltar Monetary of Boca Raton, Fla.; it claimed he could earn up to
300% from the euro. Bartowski basically lost it all, as did 260 of its
273 investors. Since 2001 the Commodity Futures Trading Commission has
won $300 million in restitution and civil penalties from 90 enforcement
actions brought against hundreds of firms, owners and employees for
defrauding 27,000 customers in forex schemes.
All of EverBank's single foreign currency CDs require a minimum balance of $10,000. Click here to see five EverBank single foreign currency CDs that mature in six months.