Quite a few [or rather most] countries allow USD account.
So there is no conversion.
Just to illustrare;
In India its allowed to have a USD account. The funds can be transfered as USD and withdrawn as USD, the interest is in USD. There no conversion at any point in time. Typically the rates for CD on USD account was Central Bank regulated rate of 5%, recently this was deregulated, and some banks offer around 7% interest.
Why is the rate high on USD in India?
- There is a trade deficit which means India gets less USD and has to pay More USD to buy stuff [Oil and other essential items].
- The balance is typically borrowed say from IMF or other countries etc.
- Allowing Banks to offer high interest rate is one way to attract more USD into the country in short term. [because somepoint in time they may take back the USD out of India]
So why isn't everyone jumping and making USD investiments in India?
- The Non-Residents who eventually plan to come back have invested in USD in India.
- There is a risk of regulation changes, ie if the Central Bank / Country comes up pressure for Forex Reserves, they may make it difficut to take back the USD. IE they may impose charges / taxes or force conversion on such accounts.
- The KYC norms make it difficult for Indian Bank to attract US citizens [except Non Resident Indians]
- Certain countries would have explicit regulations to prevent Other Nationals from investing in such products as they may lead to volatility [ie all of them suddenly pull out the funds]
- There would be no insurance to foreign nationals.
The FDIC insurance is not the reason for lower rates. Most countires have similar insurance for Bank deposits for account holdes.
The reason for lower interst rate is all the Goverments [China etc] park the excess funds in US Treasuries because;
1. It is safe
2. It is required for any international purchase
3. It is very liquid.
Now if the US Fed started giving higher interest rates to tresaury bonds say 5%, it essentially paying more to other countries ... so its keeping the interest rates low even at 1% there are enough people [institutions / governemnts] who would keep the money with US Treasury.
So the US Treasury has to make some revenue from the funds kept at it ... it lends at lower interest rates to Bank ... who in turn lend it to borrowers [both corporate and retail].
Now if they can borrow cheaply from Fed, why would they pay more to Individual Retail on CD?, they will pay less; because the lending rates are low as well.
Check out the regulations