Complete Guide to Foreign Currency Deposits: Grow Your Savings in Multiple Currencies

Most people keep their savings in a single currency, typically their home currency. But what if you could earn interest on deposits held in US dollars, euros, Japanese yen, or British pounds? Foreign currency deposits (FCDs) let you do exactly that, offering a way to diversify your savings while potentially profiting from favorable exchange rate movements.

This guide covers everything you need to know about foreign currency deposits, from how they work to the strategies that can help you make the most of them.

What Is a Foreign Currency Deposit?

A foreign currency deposit is a bank account that holds funds in a currency other than your home currency. Instead of depositing Korean won, US dollars, or whatever your local currency is, you convert your money into a foreign currency and deposit it in a special account.

These accounts typically come in two forms:

• Foreign currency savings accounts: Similar to regular savings accounts but denominated in a foreign currency. They offer flexible withdrawals and modest interest rates.
• Foreign currency time deposits (fixed deposits): You lock your money for a set period (1 month, 3 months, 6 months, 1 year, etc.) in exchange for a higher interest rate.

How Do Foreign Currency Deposits Work?

Here is a step-by-step breakdown of the process:

1. Open an account: Visit your bank or use an online banking platform that offers foreign currency deposit services. Not all banks provide this option, so check availability first.
2. Choose your currency: Select the currency you want to deposit. Common choices include USD, EUR, JPY, GBP, CNY, and AUD.
3. Convert and deposit: Convert your local currency into the chosen foreign currency at the current exchange rate. The bank will apply a spread (the difference between the buy and sell rate).
4. Earn interest: Your deposit earns interest in the foreign currency. Rates vary depending on the currency, deposit term, and the bank's offerings.
5. Withdraw or convert back: When you are ready to access your funds, you can withdraw in the foreign currency (useful if you need it for travel or payments) or convert it back to your home currency.

Benefits of Foreign Currency Deposits

Currency Diversification

Holding money in multiple currencies reduces your exposure to any single currency's decline. If your home currency depreciates significantly, your foreign currency holdings may retain or increase their value in local terms.

Potential Exchange Rate Gains

If you deposit money when the foreign currency is cheap and withdraw when it has appreciated, you earn a profit on top of your interest. For example, if you buy US dollars at 1,100 won per dollar and the rate moves to 1,300 won per dollar, your deposit has gained roughly 18% in won terms before even counting interest.

Higher Interest Rates

Some currencies offer significantly higher interest rates than others. While major currencies like the euro or yen may have very low rates, currencies from countries with higher benchmark rates (such as the Australian dollar or certain emerging market currencies) can offer more attractive returns.

Useful for Future Expenses

If you know you will need foreign currency in the future, whether for tuition payments, travel, business transactions, or overseas property purchases, depositing that currency now can protect you from unfavorable rate movements later.

Risks to Understand

Exchange Rate Risk

The same currency movements that can generate profits can also cause losses. If the foreign currency depreciates against your home currency during the deposit period, you could lose money even after earning interest.

Example: You deposit $10,000 when the rate is 1,300 won per dollar (costing 13,000,000 won). The interest earned over a year is $200. But if the rate drops to 1,100 won per dollar, your total of $10,200 is only worth 11,220,000 won, a loss of 1,780,000 won.

Spread Costs

Banks charge a spread on currency conversions, meaning you buy foreign currency at a higher rate and sell it at a lower rate than the mid-market rate. This spread can eat into your returns, especially for short-term deposits.

Lower Deposit Insurance

In many countries, foreign currency deposits may have different insurance coverage than domestic currency deposits. Check your local deposit insurance rules to understand your protection level.

Interest Rate Differentials

If the interest rate on your foreign currency deposit is lower than what you could earn in a domestic deposit, you need the exchange rate to move favorably just to break even.

Strategies for Foreign Currency Deposits

Dollar-Cost Averaging

Instead of converting a large sum all at once, spread your purchases over time. Buy a fixed amount of foreign currency each month to average out the exchange rate and reduce the risk of buying at an unfavorable peak.

Target Rate Strategy

Set a target exchange rate at which you want to buy the foreign currency. Use rate alert tools to monitor the market and act when your target is reached. This requires patience but can result in better entry points.

Laddering Time Deposits

If you choose fixed-term deposits, consider laddering. Spread your money across deposits with different maturity dates (1 month, 3 months, 6 months, 1 year). This gives you regular access to portions of your funds while still earning higher rates on longer-term deposits.

Match to Future Needs

If you have a specific future expense in a foreign currency, such as university tuition in the US or a property purchase in Europe, start building your foreign currency deposit well in advance. This "natural hedge" ensures you are not scrambling to exchange money at a potentially bad rate when the payment is due.

Choosing the Right Currency

When selecting a currency for your deposit, consider these factors:

Factor	What to Look For
Interest rate	Compare rates across currencies and banks
Economic stability	Stable economies tend to have more predictable currency movements
Your future needs	Choose currencies you will actually use
Current valuation	Is the currency historically cheap or expensive?
Correlation	Pick currencies that move differently from your home currency

Popular Choices

• USD: The world's reserve currency, highly liquid, moderate interest rates
• EUR: Second most traded currency, useful for European expenses
• JPY: Often strengthens during global uncertainty (safe-haven currency)
• AUD: Historically higher interest rates, tied to commodity prices
• GBP: Major currency with competitive deposit rates

Tax Considerations

Foreign currency deposit income is typically subject to taxation, but the rules vary by country. Key tax points to consider:

• Interest income: Usually taxed as ordinary income
• Exchange rate gains: May be taxed as capital gains or ordinary income depending on your jurisdiction
• Reporting requirements: Some countries require you to report foreign currency accounts above certain thresholds

Consult a tax professional to understand the specific rules in your country before opening a foreign currency deposit.

How to Get Started

1. Research banks: Compare which banks offer FCD accounts, their available currencies, interest rates, minimum deposits, and spread costs.
2. Check fees: Look for account maintenance fees, conversion fees, and withdrawal penalties.
3. Start small: Begin with a modest amount to understand how the process works before committing larger sums.
4. Monitor rates: Use currency converter tools and rate trackers to identify good entry points.
5. Review regularly: Reassess your deposits periodically, considering changes in interest rates, exchange rates, and your personal financial needs.

Conclusion

Foreign currency deposits are a practical tool for diversifying your savings, preparing for future foreign expenses, and potentially profiting from currency movements. However, they come with real risks, particularly exchange rate volatility and conversion costs. By understanding these dynamics, choosing your currencies wisely, and employing strategies like dollar-cost averaging and laddering, you can make foreign currency deposits a valuable part of your overall financial plan.

Start by researching the options available at your bank, set clear goals for why you want to hold foreign currency, and always keep an eye on the exchange rate trends that will determine your ultimate returns.