Should I Invest In Everbank’s Foreign Currency CDs?

While we’re on the topic of international banks, US-based Everbank does offer FDIC-Insured Certificates of Deposit denominated in various world currencies:

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The three that stand out in interest rate perspective are the Icelandic krona, the New Zealand dollar, and the South African rand. But as I’ve said before, you are at the mercy of the future exchange rates on these currencies, so these should not be considered the equivalent of a dollar-denominated bank CD. FDIC only insures against bank failure – there is still the risk of loss of principal in these investments. According to Oanda, the exchange rates of the US dollar to the krona (USD:ISK) has varied by 23.4% within the last year, the New Zealand dollar (USD:NZD) has varied by 23.7%, and the South African rand (USD:ZAR) has varied by 19.3%.

From Wikipedia entry for the Icelandic krona:

As it stands, the Icelandic currency is a fully convertible but low-volume world currency, strongly managed by its central bank, with a high degree of volatility not only against the US and Canadian dollars, but also against the currencies of the other Nordic countries (Swedish krona, Norwegian krone, Danish krone and the euro). For example, during the first half of 2006, the Icelandic kr?na has ranged between 50 to 80 per US$.

If you bought US$100 of Icelandic Krona at 1:50, have it earn 15% in a year, but then exchange it back to US dollars at 1:80, you’d still be left with only US$72. Not so hot. Of course, if the opposite happened you could end up with $184! So really this seems like a way to make a bet against the dollar with a little bit of appreciation mixed in, if you feel so inclined. I’m amused by this option, but I think I’ll leave the gambling to Vegas for now. (The minimum investment is also $10,000.) I do want to visit Iceland though – perhaps for “investment research”? ;)

Added
Commenter Andy astutely points out that you’ll essentially be charged 1% in and out for a currency exchange fee as well – “The currency conversion rate will be within 1% of the wholesale spot price EverBank pays for the currency.” This will especially hurt the shorter-term CDs.

If you would like some more background on why interest rates in Iceland are so high, check out this NY Times article on Iceland’s fizzy economy. They are trying to tame inflation fueled by a hot stock market and housing boom, and definitely gives the vibe of a potentially volatile situation.

Comments

  1. According to their site, the currency conversion rate is “within 1% of the wholesale market rate”. So it sounds like you’ll lose ~1% from doing the conversion?

    Since the Iceland CD is for 3 months you actually get an APR of about 8.2%.

  2. Good point on what is basically a currency conversion fee.

  3. Everbank nickel and dimes you with fees, even in checking. $30 for checks, mysterious $5 fees, constantly changing interest rates. I wouldn’t put $10,000 anywhere near Everbank, especially with no upfront notice about costs.

  4. Ted Valentine says:

    This reminds me of the opening to Andrew Tobias’s book.

  5. Steve Austin says:

    I opened an EverBank free checking account last year for their 6% 3-month intro rate; I think they still have that deal. This was not related to their foreign currency products, and I agree with the above commenters about not investing in those foreign currency CDs. If someone is a forex expert, there are probably more cost-effective ways to play there.

    I can report that I did not get nickel-and-dimed by any EverBank fees for my free checking account, but customer service at their Islandia NY online service center is poor and the folks I dealt with were nearly incompetent. Opening the account there was the most painful administrative process I’ve ever experienced short of dealing with health insurers. They finally got everything opened and square but I cannot recommend dealing with them if you value your time.

  6. I have Euro CD’s with Everbank. These offer around 2.5% APY for a 3 month, but I have hugely benefitted against the Euro appreciation against the $. Agreed that timing is what matters and the advantage may depreciate over time, but I feel that $ is set to weaken strongly in the coming months/years on account of the huge trade deficit and low gdp growth and everbank provides you with a easy hedge option to hold money in another currency.

    No blues so far with their fees and service. Overall achieved around 10% return on currency appreciation so far on account of $ depreciation

  7. broknowrchlatr says:

    The New Zealand Dollar rates look good. I think their marekt is more stable.

    with any of them, I’d like to see a 3-10 year rate.

    At 10 years, a 6.5% rate would come out to a 6.25% rate when taking out 1% on each side.

  8. NZ Dollar and Iceland Krona lost considerable value in the past couple of months. What is happening is that most of the investors are shifting the money from these currencies which offer high interest rates to Euro and US$ which are raising the interest rates thus reducing the attractiveness of NZ Dollar and Iceland Krona.

  9. Don’t forget about interest-rate parity, either. (The idea is that a difference in interest rates between countries reflects expectations of variations in exchange rates: higher interest rates reflect the expectation of a weaker currency.) Iceland’s 12% interest rate is highly suggestive of a weakening currency.

    Your focus on low-expense index funds is probably the right way to go; investing in foreign currency CDs, is, in the long term, not much different than investing in dollar-denominated bank CDs, but with additional risk and fat currency-conversion fees.

  10. In the end though, all these other currencies are merely paper backed by empty promises.

    Go with some physical gold and silver.

  11. I was all excited to post something re: unhedged currency exposure, but Don_M’s fiat currency complaint just took the wind out of me…

    Yah–cuz pulling some hunk of metal out of the ground, refining it, molding it, then putting it back in a hole in the ground is SoOOooo much better…

    Everything–currency, tulip bulbs, gold, Bruce Springsteen tix, uncancelled checks, wampum–has only the value assigned to it by the markets.

    Without currency, you must needs await the end of the world before you can shave some dust off’n those gold blocks and use it as payment; as it stands now, you have to suffer frictional loss translating the gold from and to some form of currency. There are other, perhaps better “investments”…

    When the so-called “emptiness” of currency’s promise is realized, the investment you made in a log cabin, an organic garden, and a trusty 12-gauge (with shell reloading equipment) will prove much more valuable than any gold bar you might have.

    All yer gold ain’t a gonna buy my moo cow nor none my veggies at THAT stage, Mr. Goldbug.

  12. Few quick questions – doesn’t future currency value speculation sort of defeat the purpose of a CD? Foreign CDs will offer a guaranteed rate of return – but that would be only virtual due to the constantly changing exchange rates. You are right when you sort of draw a parallel between this and gambling. :)

    Also, aren’t the high interest rates (especially Iceland) indicative of inflationary pressure on the Krona? – which would sort of suggest that it’s value may drop with respect to the Dollar. Any insight into this?

    To add to Andy’s comment on currency conversion fees – I understand it as the difference between “buying price” and “selling price” of a given currency….which will eat into the returns.

  13. IMO it makes more sense to invest in international equity funds if you want foreign currency exposure. With the currency volatility these CDs have similar risk and much lower returns. So there’s not really any reason to own them.

  14. i can’t believe you people are consulting Wikipedia for financial advice!!

  15. The currency conversion fee is 1% – .5% for USD to ISK, and .5% for ISK to USD. One may buy a new ISK CD after 3 months without an extra fee.

  16. TallWes says:

    I had a Peso CD with EverBank a few years ago. I made some money and was throughly pleased with EverBank. I didn’t have any “nickel and dime” fess.

  17. Has the past performance been good?

    Might as well trade the FOREX if you are going to invest in currency.

  18. Sam’s comment is on target. Before investing in a foreign CD, make sure you spend time studying the currency’s index so you understand how much exchange rate risk you are taking.

  19. Japanese have been doing it for a long time–borrow at 0% at home, invest abroad (setting risk level by choice of currency), and reaping arbitrage rewards–just like the big boys! Lots of articles on how this is NOT the best time to join the carry trade…

  20. This is beyond my realm of financial understanding. In other words, I’m clueless.

    Let us know what you end up doing.

  21. “When the so-called ?emptiness? of currency?s promise is realized, the investment you made in a log cabin, an organic garden, and a trusty 12-gauge (with shell reloading equipment) will prove much more valuable than any gold bar you might have.”

    I don’t disagree totally with this assessment. However, there will be a need for “real money” in post fiat economy.

    Read some Rothbard “The Case Against the Fed” and “What has the Government Done to Our Money” to understand why fiat currencies always fail. No, a precious metals backed system is not perfect (along with real private banking), but it always be better than a dictator of currency guessing what the price of money should be or how much of it should be released without any market mechanisms.

  22. clicclic says:

    Gold is becoming (quickly) a highly leveraged hedge against oil. It no longer trades with the dollar, but trades with the world’s real currency now – OIL.

    If oil spikes for any reason to $80/barrel, expect gold to top $850 within a week. From that point forward the world will be used to $800 gold and we’ll be in the not-so-new (1980 anyone) age of true inflation.

    Goodbye U.S. $!

  23. Michael says:

    Prav: Whatchu talking ’bout?

    Foreign (I’m from NZ) people are moving money like crazy into NZ banks. Which is making our dollar appreciate. And interest rates look set to continue increasing aswell. NZD hit it’s highest value since the float in the 80′s last week, then the reserve bank (our central bank) dumped a boatload of NZD into the market to try and bring it down, but all that’s happened is it’s all been happily bought and it’s now back at the levels before the dumping.

  24. Looking at there rates, you would think something like South Africa Rand earning +7% would be great, but think about it more, do you want anything to do with south africa, they have alot of wars/aids problems, I would never want my money down there. I would perfer a more stable country like Canada, they are peaceful and don’t have any world conflicts, so investing in canadian money would be good even though its a lower rate, its no risk at all.

  25. I was thinking about investing in Everbank foreign currency CDs but after reading several pages of negative comments concerning Everbank on Epinions.com, I’ve decided against it. There were several stories of week long delays for deposits being credited to accounts & month long delays for receiving funds from closed accounts. I agree with Don_M. Precious metals are one of the the few commodities that will always have intrinsic along with food, water & arms.

  26. Invest with Dax says:

    I’ve invested in the Iceland CD and had 2 3month terms so far. I’ve made 15% in 6 months with currency appreciation.

    I think the dollar will continue to fall considering the Fed will have to lower interest rates at least one more time. That being said, it would be a good time to pickup the Iceland CD.

  27. Anybody!!! What foreign currency would be a good investment and what bank? Thanks

  28. I’ve been banking with Everbank for about a year. I’ve made between 25% – 30% (depending on the day’s exch rate) on an Iceland CD. I’ve put more money in since, but am concerned with something I’ve uncovered today.

    I went to the FDIC web site and started to review the balance sheet information. I was disturbed to notice that NonCurrent Loans and Leases registered at 6.79% of total loans, with about 3/4 overdue by more than 90 days! That compares with 1% Non current Loans and Losses for all National Savings Banks as of 6/30/07.

    I’m certainly not an expert on bank analysis, but that number, if it’s right, seems awfully high. In addition, Everbank recently purchased a large chunk of assets from the recently failed NetBank. Everbank says that it does not invest in risky subprime loans, but why are they experiencing so many overdue loans? Is Everbank the next E*Trade?

    Can someone smarter than me comment on these numbers? I found them here:
    http://www2.fdic.gov/idasp/confirmation.asp?inCert1=34775&AsOf=MostCurrent&Refer=ID
    (generate the report for “Assets and Liabilities”, switch to “Ratios” and look in the “Memoranda” section)
    and here: http://www2.fdic.gov/sdi/main3.asp?cert=34775&repdte=MostCurrent
    (hint, use the pull downs on the right to select “Standard Peer Group” and “All Savings Banks” then hit “Next” and on the next report, select the radio button for “Ratios”.

  29. I understand how taxes on the interest works, but how does capital gains tax work for foreign CDs? I don’t have any capital gain tax due until I actually convert to US dollars, right? If I buy a 3month CD but let it rollover 4 or more times before selling, then I only have to pay long-term capital gain on the total accumulated appreciation at the very end? I wasn’t sure if the term of the CD somehow caused your gains to be automatically realized.

    Here’s an interview w/ Everbank about the CDs:
    http://bankdeals.blogspot.com/2007/07/everbanks-world-currency-cds-my.html

    Personally I think the dollar is doomed.
    Foreign equities are probably better than domestic equities but a US depression would likely ripple through world equity markets.

    For B Fischer, here’s my choice of currencies:
    http://seekingalpha.com/article/28651-unwind-the-yen-carry-trade-with-these-two-etfs

    Anyway, I think commodities and the DJP commodity ETN is maybe even a better choice.

  30. conra, any simple dc says:

    i’m so confused about all these comments, is there any simple investment for financial limited capital retired person like me to earn 8 to 12% to live on?

    any input is kindly appreciated
    conradC

  31. B's $10k to play with says:

    Like it says, I’ve got $10k to play with. Though there are many negative comments here, I wonder how many negative-ers are living paycheck to paycheck. Once you’ve paid off all your debts and are living in the black, a one-week, or even a one-month delay to reap your 8-12% gain on money you’ve tied up for a year isn’t really all that bad. Especially if you’re in an organization which tends to take its time with your finances coughcoughthemilitarycoughcough. :-) Good luck with your investments, everyone. I’m leaning toward one year of the NZD at 6.75% this year. First time for everything, and it’s better than the current 4-5% Money Market it’s currently in. Cheers!

  32. Folks, I am new to the world of investing . Back in Nov I invested in the Everbank Icelandic Krona foreign CD. Everything was looking good until a few weeks ago, now I am @ 2K loss. My maturity date is 2/6 and need to decide whether to withdraw or automatically rollover
    until 5/7. I would like to get advice from you expeienced investors out there. Would you sell out or hold on to the CD? Thanks!

  33. Dave,

    I would say don’t panic, and look at the long term USD/ISK chart. The long term trend points to the USD falling further.
    Now look at what the using is facing with the sub-prime/credit blow ups. All these these things point to a weakening dollar as the Fed tries to keep us out of a full blown recession.
    I also have invested in the ISK CD and am looking to add to my position or get one from another country. I would treat any rallies in the USD as times to add to ones foreign currency position….just like the Bears have shorted the rallies on Wall Street.
    To answer your question, I would keep the CD. The Fed is just getting started with rate cuts.

  34. J. B. O'Daniel says:

    I tried to open an account with Everbank and met with confusion and incompetence. I could not complete an application on line, the web site would not allow it. Each “customer care specialists” wanted different information and I never did get the account opened because no one there seemed to know what they needed.

  35. Thanks for your feedback SoulFire. I just got the letter from Everbank on the ISK CD maturing on 5/7. I am just going to hold it for now (ive lost 6K so far). There jury is still out on whether the dollar will strengthen. From what I’m hearing the odds of dollar slipping are slim, so dont see this CD going anywhere for now.

    http://www.theseminal.com/2008/02/27/dollar-weakens-but-some-investors-are-betting-on-a-comeback/
    http://www.fxstreet.com/technical/market-view/weekly-analysis/2008-04-08.html

    How are you doing with the ISK?
    Dave

  36. usc18081 says:

    I’ve invested $30,000 in the Iceland CD. For the first several 90-day terms I rolled it over, interest and all. Though I’m down about $4K now (was up$2.5K at one point) I’m taking the interest in check form every 3 months averaging anywhere from $850 to $650-still not bad compared what US banks are paying. With the rate currently at around 74 Krona to $1, I would definitely look at investing in an Iceland CD now as the rate hovered around 58-68 most of last year.

    One thing I don’t see a lot of currency commentators discussing is the massive US Government debt at $9.4 Trillion and continuing budget deficits of $400+ billion a year. With China owning around $1 Trillion of US Debt and Japan around $700 Billion, pretty soon foreign governments are going to figure the US cannot live in its means and quit buying our debt-especially with the Fed cutting rates so much.

    Another issue that concerns me is that the past US economic expansion was fueled by massive consumer spending, which was because of large credit card debts, and with the housing boom folks taking cash out of their homes. I had heard warnings about 2 years ago that this growth streak was fueled by consumer debt and now they have to pay the piper. I think a lot of consumers are tapped out-owing a lot in debt. I don’t see how anyone can expect consumers to keep spending at past rates to pull the economy out of this funk.

    Thoughts?

  37. Need some help, i invested in the icelandic krona late last year, so far ive been losing money. today i got this email from everbank.

    I am writing this email to make sure you know about recent events which have taken place in Iceland. If you are a reader of my Daily Pfennig, you have read about the banking crisis which has recently occurred in Iceland. The government has had to step in and raise interest rates to try and combat a dramatic fall in the value of the krona. But these higher official rates have not been reflected in the forward rates on which we base the interest rate paid on 3 month CDs. Due to the credit crisis which has gripped the banking sector in Iceland, the forward rates have come down to just 3.03% APY. I realize many investors have selected this currency for the high rates which were formerly available, so I wanted to make sure everyone was aware of these new rates.

    As always, we will need your instructions for this maturing CD by
    Friday, May 2nd. Many of you have probably already given us
    instructions on these CDs, but I just wanted to make you aware of these recent developments and give you an opportunity to change your instructions.

    has the time come to pull out of the krona? thanks for replying

  38. Dave,

    Yeah, I got that email too a week earlier stating that rates went down. I called them before receiving that email to ask about it since I noticed the rate change on the website.
    They gave me this story about the cost of obtaining the funds is now more expensive in light of the the credit crisis in Iceland. That excuse doesn’t hold water with me since I find it very hard to believe that they need to subtract 12% to handle expenses. Sounds very fishy to me.
    The woman I spoke with told me they would raise rates again as soon as the issue subsides.
    I’m willing to hold for now and keep my CD even with the lower rates, since I think the Krona will eventually rise against the dollar and keep with the long term trend. I’m also researching if there is a possibility of opening an account in one of the Iceland banks directly and transferring my money there.
    What makes me mad about Everbanks move is that they want us to carry most of the risk while keeping the bulk of the reward for themselves.

  39. Sherlock says:

    Question one should be asking is HOW TO HEDGE against currency risk. What product(s) is available to retail investor. Does anybody have some insight on this?

  40. What do you think about Everbank’s Foreign Currency checking accounts? Given everything that happened to the markets recently, we’re considering placing our $ in a Euro account since the $ keeps falling. We’re not looking at CDs because we want quick access to our money. Would you recommend them for a simple Euro Account not a CD? Thanks!!

  41. “since the $ keeps falling” actually the complete opposite has been occurring so far. In late July one will pay 1.60 to purchase 1 euro, today that price is 1.38. Dollar has gained substantially. More of king dollar is expected down the road. Placing money into euros is a big NO NO for now.

  42. Hey guys, im sure by know you folks have recieved the letter from Everbank about the banks have been taken over by “Icelandic regulators”. I have lost already more than 50% of the money. My CD matures on 11/5/08. I know for now the US dollar is going to come back gradually for now, but eventually there will be a cycle where the inverse will happen, and I have a long investing horizon.

    Does anyone know what the implications of the banks being ciezed by regulators means? Is there any possibility of light at the end of the tunnel or shall I throw in the towel? Thanks in advance and looking forward to your advice.

  43. Anyone who gets suckered into these foreign CDs with their high interest rates is nuts. These are not your ordinary CDs where capital preservation is key as I thought. These so-called CD accounts are little more than glorified Forex accounts where you speculate in currency pairs. Very volatile. I lost 10% in 10 days and closed the account even though it meant taking a penalty for early closure. These things are toxic toxic toxic, and I complained to the bank about classifying them as CDs.

  44. Foreign currency CDs is like FOREX continuously played for a longer term, rather than just spot, except you get have a certain percentage (much smaller than the 3 sigma amplitude) in reserve. The odds are much better than gambling (more like 1:1 rather than 1 million to 1), but much worse than what investment should be. When we invest in something, we should have better information (an edge) about what we invest in than 1:1 odds. If we invest in Coke or Johnson & Johnson, the odds are much better than 1:1 that we will make money. My advice is to be really clear-headed about the direct correlation between risk and return, and to have a long term strategy on investing, because anyone could possibly win a million-dollar lottery, but generating wealth by winning lottery cannot be a long term strategy.

  45. WHATS THE BEST WAY TO GAIN SOME $ USING EVERBANK.COM WITHOUT RISK AND NOT HAVING TO PUT DOWN ALOT OF CASH?

  46. A financial journalist would like to interview investors who lost money in Icelandic CDs last year. From the comments on this thread, it sounds like a number of regular posters fit the bill. If you would like to talk to me about your experiences with Icelandic CDs for a book that I am writing, email me at: bookjat@gmail.com.

  47. I lost a lot of money with forex CDs. On top of that I had to pay tax on the interest earned. This year I’m cashing some CDs out and converting to USD. Does anybody know if I can right off the losses in taxes? Will it be considered as a $3000 limit loss like stock market.

  48. Soulfire says:

    Based on my research, you can treat it like a stock investment and put it on your Schedule D. Your cost basis would be your initial funding for the CD plus whatever the bank fees were. In addition add the interest received since you already paid taxes on that. Your final USD conversion value is what you use to determine whether you had a net gain or loss. Losses are tax deductible just like the gains would be considered taxable income.

    Investment losses are currently limited to a net max of 3000 per year.

  49. Lacto Ovo Vegetarian says:

    Avoid everbank…they have terrible customer service and the foreign currency CD’s are FOREX trades.

  50. I recently published an article suggesting investors stay away from these. 7 years later, interest rates everywhere are in the toilet and the main suspects (ie: Everbank) are basically paying 0%. While I’m all for currency diversification, you can do better by opening an account outside of the US and gaining other forms of diversification as well. Why settle for 0% and pay fees to a US bank?

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