Foreign-currency CDs can be awfully tempting for savers chasing higher yields. These certificates of deposit can offer mouthwatering rates of 6% or more.
But be aware that they're pegged to foreign currencies that can slip and slide unexpectedly. As you consider making foreign-currency CDs part of your portfolio, understand the risks and rewards.
How they work
Foreign-currency CDs can be issued in euros, Indian rupees, South African rands or Brazilian reals, to give a few examples. The CDs are exchanged for dollars so a U.S. buyer can invest. They are converted back to dollars when the CD matures.
However, there are currency exchange risks when you make the conversion back to greenbacks. A strengthening dollar can wipe out your return.
"That's a big impact. And the currency markets have become more volatile," says Walid Petiri, president of Financial Management Strategies in Baltimore.
Given the risks, Petiri says investors shouldn't consider foreign-currency CDs as safe as traditional CDs. Instead, he says think of them as "enhanced fixed-income replacements," because you can get higher total returns than regular CDs.
RATE SEARCH: Compare CD rates on Bankrate.
Not for the risk-averse
Still, there are solid benefits for investors who can stomach the risk. If a foreign currency spikes against the dollar, you'll nab a higher total return than on traditional CDs. And that higher rate also is guaranteed.