What’s the Difference Between a Dollar CD and a Foreign Currency CD?

From our Currency Research Team:

As you may have heard, a foreign-currency CD is one of the simplest ways to buy foreign currencies.

You’re not really trading one currency for another like in the foreign-exchange market. Nor are you investing with leverage like a currency option.

Instead, you’re just buying and holding a foreign currency - just as if you were holding an average dollar-based CD.

Really, it’s just a four-step process:

1. Decide to invest in a certain currency
2. Call your bank
3. Apply for the CD in a particular currency
4. Forget about your CD until it’s time to report your holdings on your taxes each year.

In fact, it’s so similar to your average dollar CD that it’s easy to forget the extra benefits you’re receiving by investing in a foreign currency CD.

So we thought we’d review these benefits quickly.

Benefit #1: You can actually beat inflation with a foreign-currency CD. Right now, you’re average dollar-based CD only pays 2 - 4%. If inflation is soaring above 6%, then you’re actually LOSING money over the long haul. But with a foreign currency CD, you can choose a stronger currency that has the power to appreciate faster than inflation.

Benefit #2: Two ways to profit. A foreign-currency CD earns interest similar to a normal dollar-based CD, but you also get an extra profit bonus if your foreign-currency appreciates in value vs. the U.S. dollar. In this way, your foreign-currency CD actually gives you two ways to profit.

Benefit #3: Instant diversification. If your entire portfolio is in dollars, then a simple foreign-currency CD gives you instant diversification to other stronger currencies around the globe. It’s one of the best ways to inch into the currency markets, if you’re not interested in trading.

Don’t know which CD to invest in? Check out EverBank’s All-Weather Portfolio - that includes diversification across many foreign currencies plus gold.

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