Saving
Saving in a second currency adds a variable to a simple product
A deposit in another currency pays that currency's rate. What it is worth to you depends on something else entirely.
Most explanations of saving in a foreign currency stop at the point where it starts to matter. This one carries on.
The short version
- The rate and the exchange movement are two separate returns.
- A higher rate abroad often reflects expectations rather than a free gain.
- Protection schemes and tax treatment differ by where the account is held.
Two returns, not one
A deposit denominated in another currency earns that currency's interest rate, which is set by conditions in that economy rather than yours. When you convert the balance back, the amount you receive also depends on how the exchange rate moved during the period. Those two effects are independent, and the second is routinely larger than the first over short periods.
A high interest rate can therefore be entirely erased by an adverse currency movement, and a low one can be swamped by a favourable movement. Describing such an account by its interest rate alone omits the variable that will probably dominate the outcome.
Why the rates differ
Interest rates differ between currencies for reasons rooted in each economy, including the rate of price change and the policy stance of its central bank. Markets price forward exchange rates in a way that broadly reflects those interest differences, which is a well-established relationship in currency markets.
Practically, the practical implication is that a visibly higher rate abroad is not usually a free gain waiting to be collected. It may still turn out well or badly, but the higher rate is compensation for something rather than an oversight in the market. Treating a rate gap as an arbitrage opportunity available to retail savers misunderstands what the gap represents.
When a foreign currency balance makes sense
The clearest case is a genuine liability in that currency, such as a mortgage, school fees, a planned move or family support. Holding the currency you will actually spend removes exchange risk rather than adding it, which is the reverse of the speculative case.
People paid in one currency and living in another have a similar structural reason to hold balances on both sides. In each of these the currency position is being matched to a real obligation, which is the only version of this that reduces risk. Where there is no such obligation, the account is a view on exchange rates whether or not it was intended as one.
The costs that are easy to miss
Converting money in and out incurs a spread, and that spread is charged twice across a round trip. Retail conversion spreads are often wider than the headline rates quoted in the financial press, which compare wholesale prices. Some accounts also charge maintenance fees for holding a currency, and transfers between institutions can carry their own charges.
Together these can consume a meaningful share of any interest advantage before the exchange rate has moved at all.
Working out the total round-trip cost first tells you how large a rate advantage would need to be to matter.
Protection and jurisdiction
Where the account is held determines which deposit protection scheme applies, what its limit is and which currency that limit is expressed in. An account with a domestic bank denominated in a foreign currency is not the same as an account held abroad, and the protections differ. Tax treatment of interest, and in some countries of exchange gains themselves, varies considerably and can be more complex than expected.
Reporting obligations for accounts held overseas exist in many jurisdictions and carry penalties when missed. These are exactly the areas where general descriptions fail, so the position in your own country should be confirmed before opening anything.
Sizing a position honestly
If a foreign currency balance is held for a real obligation, its size should reflect that obligation rather than a view on rates. If it is held speculatively, it should be sized as a speculative position, meaning small enough that an adverse move changes nothing important. Exchange rates between major currencies can move by substantial amounts over a few years, in both directions and without warning.
Emergency reserves in particular are poorly suited to currency exposure, since the need and an unfavourable rate can arrive together. This is general information about how such accounts work and not a recommendation to hold any currency.
The takeaway
Hold another currency because you will spend it, not because it pays more. Otherwise the interest is the small half of the outcome.
The decision is rarely about picking the best option — it is about avoiding the expensive one.
Questions readers ask
Should I move savings to a currency with higher interest rates?
The higher rate generally reflects conditions in that economy, and exchange movements can exceed the rate difference entirely. It is a currency position, not a better savings account.
Is a foreign currency account protected?
It depends where the account is held rather than what currency it holds. Check which national scheme applies and what its limit is before relying on it.
