The Risk of Foreign Currency Fixed Deposits

We all know that the banks interest rates at 0.1% is rubbish. Even the fixed deposit interest rates are rubbish. So I've been tinkering with the idea of converting a portion of my funds to a foreign currency to be locked up in a fixed deposit account for the sake of portfolio diversification as well as to earn the higher interest rates. However, like all investments, this comes with their own risks. The most important of all is foreign exchange risks, where the original currency gains in strength to the foreign currency thereby resulting in a lower value of the original invested sum when the foreign currency is converted back. Confused? Don't be.

Here's an example to illustrate:
2010 S$1 = A$0.90
2011 S$1 = A$1.00
2012 S$1 = A$0.80

Therefore if you converted S$10,000 into Australian Dollars (A$) in 2010, you'd get A$9,000. In 2011 however, if you were to convert the same A$9,000 back into Singapore Dollars (S$), you'd wind up with S$9,000. But if you were to hold on to 2012, the A$9,000 would now have been worth S$11,250 instead.

So you can see from the above example how a simple shift of 10cents can drastically affect your invested amount.

Note that this is without any interest paid by the bank.

In my next post, I'll elaborate on how interest affects your deposit in the foreign exchange fixed deposit. But for now...

Ciaoz Amigos!
~K