Invest in Foreign Currency

Some people invest in foreign currency deposits to enjoy a higher interest rate. They stand the risk of exposure to foreign currency loss. A foreign currency that pays a higher interest rate is likely to be a weaker currency, so this risk can be quite real.

For example, Australian and New Zealand dollars paid a high interest rate during most of the past three years. When the currency weakened in late 2008, it dropped by almost 30% within two months. Some people who invested on leverage had to close their position and lost 50% to 100% of their capital sum.

For those who are luckier, they did not earned that much. This is due to the high cost (as reflected in a large spread) of converting from Singapore dollars to the foreign currency and back. The spread can be as high as 1%.

If the difference in interest rate is 4% per annum, and you invested for 3 months to earn 1% extra, this can be totally wiped out by the spread. Why take so much risk for so little gain?

Read my FAQ on "Invest in Foreign Currency" in www.tankinlian.com (Ask Mr. Tan), to learn about this risk and the potential pitcalls.