Thursday, October 04, 2007

Investing in Foreign Currency Deposit

Hi Mr Tan,

I like to ask about Foreign Currency Time Deposits.
What are the risks involved if I put my money in Foreign Currency Time Deposits?


The risk is in the currency exchange rate.

For example, if you put $10,000 in New Zealand dollars for 1 year to earn 7% interest (compared to 2% in fixed deposit in S$), you will earn 5% more in the interest for 1 year.

At the end of 1 year, if the NZ$ depreciated by 5% against the S$ during the 1 year period, you are in a neutral position (compared to keeping in S$ deposit).

If NZ$ depreciates by more than 5%, then you will lose on the NZ$ deposit.

If NZ$ depreciates by less than 5%, you will still be better off, by investing in NZ$ deposit.

If NZ$ appreciates against the S$, you will get double benefit, first from the higher interest rate (i.e. difference of 5%) and second from the higher exchange rate.

The challenge is to know what is the likely trend of the NZ$. No one can help you to make this decision. The currency experts do not know, especially in 1 year's time. I do not know.

If you study the trend of NZ$ over the past few years, you will find that it has the potential to move up or down 10% within a short period.

The same remark applies to investing in any other foreign currency deposit.

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