Foreign currency fixed deposit accounts are fairly similar to Singapore fixed deposit accounts, but differ by introducing the risk of variable foreign exchange rates.

This guide reviews how these deposits work, covering key factors that drive interest earned and important risks to consider.

What are foreign currency fixed deposit accounts?

Foreign currency fixed deposit accounts allow consumers to convert SGD to foreign currency units, which are then deposited for a set period of time, earning interest at a predetermined rate.

These bank-offered interest rates are contingent on the tenure of the deposit, as well as the amount of funds deposited.

For the most part, longer periods and higher deposit amounts will earn you the best fixed deposit interest rates. When the deposit tenure ends, the deposited funds are converted back to SGD according to prevailing foreign exchange rate.

Banks across Singapore offer foreign currency fixed deposits for a variety of foreign currencies, each with unique interest fixed deposit rates.

Offered currencies usually include USD (United States), AUD (Australia), CAD (Canada), GBP (UK) and more. Surprisingly, different banks offer different interest rates for the same countries.

For example, one bank might offer 0.78 per cent p.a. interest for an AUD10,000 deposit across six month tenure, while another might offer 1.7 per cent p.a.

In most cases, banks require a minimum deposit, usually in terms of foreign currency units. Requirements usually fall between 5,000-10,000 units. However, some countries tend to have higher, specific requirements. For example, JPY (Japan) and CNH (China) often have minimum deposit requirements of 250,000+ units.

Factors that determine total deposit earnings

The final amount earned from a foreign currency fixed deposit is highly dependent on four factors: The amount invested, foreign currency exchange rate, bank-offered interest rate and deposit tenure.

To begin, consumers must decide on how much they'd like to invest in terms of foreign currency units. This determines the amount paid in terms of SGD, based on the current foreign currency exchange rate.

For example, opting to invest USD10,000 would require SGD13,800 payment if the exchange rate is 1.38 (USD1=SGD1.38). This initial exchange rate is very important, as it determines whether consumers will gain or lose money when their deposit matures, and funds are converted back to SGD.

Converting currency for initial investment

Ultimately, the variability of foreign exchange rates introduces an element of risk to foreign currency fixed deposits. Nonetheless, there's a greater likelihood of gain than loss as inherent interest rates bolster final earnings.

In fact, the final amount gained by an increased exchange rate would be larger than the corresponding loss of a decrease equal in size.

How exchange rates impact bank-offered interest rates

Foreign currency exchange rates influence more than just whether a fixed deposit will earn or lose money; they also factor into what interest rates banks offer.

Countries with relatively stable currencies tend to be paired with lower interest rates; those with greater variability or risk are paired with higher interest rates.

In fact, most Singaporean banks offer 0per cent interest on fixed deposits in Euros, JPY (Japanese Yen), and CHF (Swiss Franc).

In this case, banks simply convert SGD to the foreign currency, and after a fixed period, it's converted back. If these currencies strengthen during that period, the consumer still earns money-even without an attached interest rate.

Risks and benefits of foreign currency fixed deposits

As discussed, there is a clear risk to foreign currency fixed deposits. Unlike SGD fixed deposits, they can potentially lose money.

Consumers can also lose their interest and potentially face penalty fees if they withdraw their funds before the end of the deposit's tenure.

ALSO READ: 7 best fixed deposit rates in Singapore (Jan 2021) - DBS, Maybank & more

Nonetheless, potential gains outweigh potential loss for these types of accounts, as long as the deposit comes with an interest rate. Opting for a "safer" currency also decreases the probability of loss.

Even more, account holders can often extend or renew their deposit, so there's no need to convert currency back to SGD if the exchange rate is currently low.

Overall, a foreign currency fixed deposit is a great option if you're looking for a low-maintenance way to earn on savings and are willing to take a slight risk.

This article was first published in ValueChampion.