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Opening a foreign currency account

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Want to stretch beyond banking with bucks? Try opting for Chinese yuan.

More people are moving into nondollar bank deposits, and the yuan is one fast-rising option. Last year, Americans could finally buy yuan in the U.S. after the Bank of China opened branches in Los Angeles and New York.

Other banks, including Cathay Bank, Citibank and HSBC, also offer foreign exchanges for putting money in foreign currency time deposits of the yuan, yen or euro.

A foreign currency account is one maintained in a U.S. or overseas bank but in a foreign currency. Stashing money in different currencies gives you greater diversification, says Ann Logue, author of “Emerging Markets for Dummies.” But there are other good reasons for bypassing the buck.

For starters, currencies such as the yuan can act as a hedge against declines in the U.S. dollar. When the U.S. dollar falls, other currencies usually rise. And many people use a foreign currency account to save for and make large purchases abroad or to pay overseas hotel bills, says Frank Trotter, president of EverBank Direct, which offers foreign currency money market accounts and certificates of deposit.

“Money can be wired to you wherever you are,” he says.

Before leaping into a foreign currency account, here are four questions to ask.

What is the account minimum? Financial institutions that offer foreign currency accounts may have higher minimums on those accounts than the minimums on regular accounts. For example, HSBC’s minimum to open an account is $50,000, while EverBank’s yuan money market account has a $10,000 minimum before you start earning interest.

Is the account FDIC-insured? Foreign institutions don’t always offer Federal Deposit Insurance Corp. backing, which protects deposits up to $250,000 per bank account if the bank fails. Bank of China’s two New York branches offer FDIC insurance, but the Los Angeles branch doesn’t, according to the bank’s website. Only the principal deposit in U.S. dollars is protected by the FDIC.

But take heart, foreign banks with U.S. branches are regulated the same as any other dollar accounts, Logue says. “So they’re functionally U.S. banks,” she says.

What are the currency conversion charges? You’ll probably be paying currency conversion fees for buying one currency and then converting it back into dollars, which can quickly eat up principal if you have lots of currency holdings.

For example, EverBank charges 0.75 percent for each buy and sell transaction. So, Trotter recommends sticking to just three to five currencies.

How much can foreign currency risks sink your return? Currencies can be highly volatile. You can lose principal when your deposit is switched back into U.S. dollars.

“There’s so much risk in currency, you don’t want to put your grandmother into these accounts,” says Jennifer Murphy, director of global capital markets foreign exchange at Union Bank in San Francisco. “A currency can move 1 percent to 3 percent in one day.”

For example, the highly volatile South African rand lost 15 percent against the dollar in the last four months of 2011.

Still, Murphy says a foreign currency account is a good tool for getting higher yields and appreciation. “Just know the risks,” she says.