I heard Clark Howard talking about foreign currency CDs, and so I looked and indeed their interest rates are much higher than US rates right now (3.75% for a year in Australia).
What risks are there (to an American) in investing in foreign CDs?
Are there any benefits besides the obvious higher interest rate?
One risk with any investment denominated in foreign currency is the exchange rate risk.
Specifically, if the value of your local currency increases relative to the Australian Dollar, then it has the potential to reduce, eliminate, or even give you a negative return on your investment unless you plan to keep the proceeds in Australian currency.
Of course, this could work to your advantage to and enhance your return if your local currency gets weaker relative to the foreign currency.
CDs in the US that are issued with FDIC insurance are guaranteed to return principal up to $250,000. Starting January 1, 2014 this amount will drop to $100,000. So, if you invest in CDs abroad you may not be protected against loss of principal and if that risk exists you should be paid much, much more.
No...if you are conservative about your investments, I wouldn't bother, unless you want to retire to Australia, take vacations or open a business there, or have some other similar tie.
There might be some stocks you can't find in the US, or property or something else you could invest in within Australia, that would make this worth the trouble. I can't imagine doing it to get +3% interest. The extra interest is always balanced against risk that Australia will decide to print up more money than the US does, lowering the relative value of their currency. On the other hand, maybe you think it is worse in the US. But thats a gamble, not about earning 3% interest.
New Zealand used to be even better, like above 6% interest. Now rates are lower, everyone printing money like crazy I suppose....
If you do this, then besides exchange rate risk, you will need to file a TD F 90-22.1 with the US Treasury and check the 1040 box that says you have a foreign bank account and pay US taxes on that interest. Not filing the TD F 90-22.1 is potentially ruinous ($250,000 fine if willful, $10,000+ for negligence).
Australia has something like the US Patriot Act that requires that you prove ID at a bank to open an account. You get points for different types of ID. I remember I had to get my doctor to sign it in 2003 or so... copying a passport wasn't good enough.
ANZ and HSBC are reputable and have online banking. Be cautious investing just for rate. There are small lenders gone under down under (bad pun, I know). Don't buy anything representing a subordinated claim on debt (yeah the rate is higher but is 2nd class if there is a default and may recover nothing). And definitely don't just click on an ad. I think you'll want a real bricks-and-mortar bank if you choose to do this.
Good Luck - Paul
It is very risky to have all your assets in the same country (even if it is your country of residence). Remember that there is "currency risk" even in your local currency, as that can lose its value, due to higher inflation that the rest of the world (or even hyperinflation). Just think what would happen if you lived in Argentina a few years ago, and all your savings were in your country.
In addition, in case your assets are confiscated, due to legal, tax, bankruptcy or other issues, assents in foreign countries are much harder for the authorities to track and freeze.
Thus, in my opinion, if you want to be on the safe side, keep accounts in as many countries and currencies as possible (of course you want to avoid "weak currencies").
