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The European Central Bank has cut key interest rates again. This also means less interest on daily and fixed-term deposits. If you want to further increase your savings, you might now look beyond the euro.
Investing in other currencies can mean new opportunities. However, there are also higher risks. Every saver should weigh these up before purchasing foreign currency.
For example, you can invest money in dollars, Swiss francs or Japanese yen through so-called foreign currency accounts. These are available at many online banks, but possibly also at the local bank around the corner.
Higher interest rates outside the euro area
Anyone who invests their money in such a foreign currency can, in principle, achieve returns in two ways, explains Timo Halbe from “Finanztip”: “The first option is that you can bet on getting a higher interest rate in other currency areas. You could now go for it For example, look at the dollar, where interest rates are still somewhat higher than in Europe.”
Even though the US Federal Reserve lowered its key interest rate again this week, the dollar still attracts significantly higher interest rates than the euro, namely around four percent. This also applies to the British pound, for example. The interest rate there is even 4.75 percent.
Deposit insurance also applies to foreign currencies
The statutory deposit protection also applies to foreign currencies for German accounts. This means that up to the equivalent of 100,000 euros, the dollars or pounds per account and customer are also protected. Some banks also have their own security systems that also protect larger amounts. This should be clarified with the bank in advance.
Banks often charge a monthly fee for the service of a foreign currency account. In addition, a one-time fee is usually charged when exchanging currencies. Last but not least, it is also lucrative for banks not to pass on the entire interest advantage to customers. How high the interest rates actually are for dollars etc. on the currency account should also be checked before purchasing.
Speculation on the Currency development
But buying a currency often comes with a second consideration for savers and investors, according to “Finanztip” expert Halbe: “The second approach is of course that I speculate that a currency will appreciate against the euro, so that I am basically at the end “I get more money out of it through the increase in the exchange rate, so that the money afterwards is simply worth more euros than what I paid in.”
Of course, this approach contains significantly more risk than simply hoping for higher interest rates in a foreign currency in the long term. The strength of a currency is primarily determined by the economic situation in an economy. The task of a currency buyer is to continually assess this.
The experts at “Finanztip” therefore recommend currency accounts for private investors “only if you regularly spend or do business with a foreign currency. So if you are often abroad and then have to pay with the currency.”
High interest rates, high risk emerging countries
If you really want to take advantage of the opportunities in other currency areas with as little money as possible, you can't just rely on the classic world currencies such as the dollar, franc or yen. The Swedish or Norwegian krone appear attractive to many savers, whether for the next Scandinavian vacation or as a parking station for cash.
And there is also a lot of interest to be had from a direct German neighbor, says Zsolt Papp from the fund company JPMorgen Asset Management: “If I now take Poland as an example. Poland offers me a higher interest rate. I earn 5.5 percent. And I would have also achieved a return of 5.5 percent in euros. You can see that it can actually be worth it.”
Sprinkle widely over Government bond funds
However, a higher interest rate alone should not tempt you to move to a more exotic currency area. The key interest rate in Mexico, for example, is currently 10.25 percent. Nevertheless, an investment in Mexican pesos would have resulted in losses in recent months. The Latin American country's currency has depreciated by around twelve percent against the euro this year.
Investing in the currencies of so-called emerging countries has, on average, been worthwhile in recent years, says fund manager Zsolt Papp. In order to reduce the risk of a single currency area, the best option would be to use funds that invest in government bonds from many emerging countries.
This means that the investor is not only buying an often higher level of interest rates, but also the opportunities of the currencies themselves. “When I look at the investable universe of emerging market bonds, there are around 25 currencies, spread across Asia, Latin America and also Central and Eastern Europe,” says Papp. “On the one hand, I get good geographical diversification. But I also get, if you will, a certain thematic diversification.”
The tax office is also paying attention Currency transactions
And savers who invest their money in foreign currencies should consider another aspect: the tax authorities always make money. This does not only apply to the interest that accrues in dollars, Polish zlotys or Mexican pesos. The withholding tax of 25 percent also nibbles away at currency gains, plus solidarity surcharge and, if necessary, church tax.
The financial authorities have been monitoring currency transactions more closely since this year. This also applies to foreign accounts of German citizens. As a taxpayer, you should therefore carefully document all currency transactions and interest income and declare them in your tax return. When investing in currencies, the opportunities and risks, as well as the tax obligations, should be carefully weighed up.