Late Tuesday, Turkey’s central bank announced a massive increase in its interest rates, from 7.75 percent to a surprising 12 percent.
At first glance, that 12 percent interest rate can sure look appetizing, especially with our own interest rates here in the U.S. down in the dumps.
Turkey’s rate hike was a move to try and bolster its currency, the lira, which has been at record lows. Already on Wednesday, there’s evidence that the move didn’t work as hoped, as the lira slipped in mid-morning trading, according to The Wall Street Journal.
Other emerging market countries also have boosted interest rates recently, including India on Tuesday, which raised its rate from 7.75 percent to 8 percent to try and stem inflation. Brazil earlier this month hiked interest rates to 10.5 percent, and South Africa also just announced a modest rate hike.
Given these rates, putting your money in foreign-currency CDs may certainly be tempting, with their higher CD rates. But as shown in Turkey, foreign currency rates can make sudden dips or jumps.
Foreign-currency CDs are naturally issued in that country’s currency, meaning that U.S. investors will exchange their dollars for Indian rupees or Brazilian reals or Turkish liras so they can invest in the CD. Then when the CD matures, the money is converted back to dollars.
But that exchange process means that a strengthening U.S. dollar (or weakening foreign currency) can wipe out those interest rate returns.
“It may be a dangerous game to buy a currency simply because of the yield,” said Axel Merk, president of Merk Investments. He noted that CDs have a fixed maturity date, meaning investors could be getting their money back at a time when the exchange rate is not favorable.
“Turkey and South Africa have political instability that leads to them being vulnerable. Raising rates won’t fix the underlying political challenges. As such, these places are going to be vulnerable,” Merk said. He said India is somewhat different because its new central bank governor is imposing more sustainable policies, although he said India is “still vulnerable during turbulent times.”
Anyone looking to invest in a foreign CD should be aware of any currency volatility and realize that these CDs are riskier than domestic CDs. If you do decide to get into foreign-currency CDs, Merk said buying a basket of currencies might be safer than a single-currency CD.
Have you ever invested in foreign currency, or ever thought about doing so? Should you invest in foreign CDs to take advantage of the higher CD rates?
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