Foreign exchange risk and your investments

We know how yummy foreign currency fixed deposits can seem at the surface, with banks offering much higher interest rates on Australian dollar or the New Zealand dollar as compared to that of Sing dollar deposits. So, it’s no surprise that many people are parking money in these higher-yielding currencies.

However, do you know that you are subjecting your investments/savings to the risk of currency fluctuations? This risk may even wipe out your return on investments if the currency you are investing in drops in value by a large percentage against your local currency.

If you are an American who have invested in assets denominated in the NZD, it may be of interest to you that since the start of 2006, the NZD has dropped by more than 15% against the USD, which is not looking good for your investments. If you are a Singaporean who have invested in assets denominated in the NZD, the NZD has dropped by more than 33% against the SGD for the same period, and that is a LOT of depreciation!

To find out more in detail about how currency risks can affect your investments, look out for the article "Currency risks and investments" in the August 2006 issue of Smart Investor (Singapore) written by myself.

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