Investors are getting kicks from the dollar while it's down.
Bank CDs denominated in foreign currencies and mutual funds that invest in foreign bonds are surging in popularity, thanks to the falling dollar, a horrific stock market and minuscule savings rates.
At Everbank, an online bank based in St. Louis, assets in foreign-denominated CDs have doubled to more than $165 million the past 12 months, says Frank Trotter, the bank's president. And investors poured an estimated $635 million into international bond mutual funds in January alone, fund-tracker Lipper says.
What's the attraction? The U.S. dollar has swooned against most currencies. A year ago, you could buy a euro for 87 cents. Now, a euro will set you back $1.08 — a 24% increase. A CD denominated in euros would give you that gain, plus interest. In contrast, the average U.S. bank CD pays just 1.86%.
Foreign-currency CDs at Everbank have yields representative of those available in a particular country. A three-month New Zealand CD, for example, yields 5%.
The Federal Deposit Insurance Corp. insures CDs against the bank's failure, but you can lose money if the currency market goes against you. Minimum investment: $10,000.
International income funds, which invest in foreign bonds, have soared 20.4% the past 12 months, vs. 8.9% for the average U.S. government bond fund, Lipper says. "It's just been a dollar story," says Brian Howell at the American Century funds. Battering the dollar:
The stock market. Foreign investors flocked to U.S. stocks in the '90s and are yanking their money out now. "If you're a foreign investor getting nervous in the U.S. stock market, you bring your money back home," Howell says.
Interest rates. Money flows to areas that offer the highest short-term rates. The fed funds rate, a key overnight interest rate, is 1.25%, vs. 4.75% for the comparable Australian rate.
The economy. U.S. gross domestic product rose at a sluggish 2.4% rate last year, and that gives the Federal Reserve little reason to raise rates.
Possible war. Global uncertainly generally drives investors to the dollar, seen as a haven. But investors are worried that the United States will go to war in the Persian Gulf without major European allies.
T. Rowe Price Spectrum funds, which invest in part in international bonds, are betting on the Canadian dollar, the euro and the Australian dollar, all of which have risen against the U.S. dollar.
The most popular single-currency CD at Everbank is pegged to the euro. Runner-up: a CD valued in New Zealand dollars. "New Zealand has a budget surplus and is remote from the troubles in the Middle East," Trotter says.
American Century's Howell says the dollar could tumble more, "These things go on longer than you think."