Updated 9/23/2009 (thanks JES)
People ask me this question a lot– what’s the best way to diversify US dollar holdings into other currencies?
Well, ‘best’ is certainly relative… I prefer commodities and precious metals as a way to protect my savings, but I can’t exactly pay my American Express bill with the bullion that I have locked away in South America.
Living in the 21st century among our modern conveniences nearly requires that we at least keep part of our wealth within the financial system– this means converting US dollars into another currency, and tucking that currency away at a bank or brokerage that is still plugged in.
So what’s the best way to do it?
Naturally, I think everyone should have at least one foreign bank account, preferably in a strong banking jurisdiction. This has nothing to do with privacy or secrecy; rather, having a foreign account is an insurance policy against stupidity risk from the stooges who run most governments.
The day they decide to implement exchange controls, take an unsolicited dip in people’s bank accounts, force people to buy their debt, or a variety of other destructive measures, your money will be safely fenced off in foreign lands. Additionally, in most cases you will be diversified out of the dollar, safeguarding the purchasing power of your savings.
In the past, I’ve discussed opening foreign bank accounts in places like Austria, Panama, and Asia… though I have to admit that I’m a bit of WC Fields when it comes to foreign bank accounts. For most people, though, a single well-placed foreign account is an excellent hedge, as long as you select a bank, jurisdiction, and currency that you feel comfortable with.
But what if you want the ability to move your savings in and out of different currencies– you think the Australian dollar will do well, and then months later decide that the Swiss Franc’s fundamentals look attractive. It would certainly be inconvenient and costly to transfer savings among multiple bank accounts.
In this case I would point you towards three specific brokerages that provide an elegant solution to this problem.
Interactive Brokers (US-based), Saxo Bank (European based), and Boom Securities (Hong Kong based) all allow users to log on and change their account’s “base currency” with the click of a button. US citizens can open accounts at any of these brokerages.
For example, suppose you fund your Interactive Brokers account today with $500,000 US dollars. Immediately, you decide that you would rather have your money in Swiss francs (CHF)… no problem. Log on to your account administration, select CHF under ‘base currency,’ and at the end of the day, the brokerage will convert your capital into francs at the spot rate.
The next time you log on to your account, the value will be CHF 510,000 (reflecting a spot rate of $1 = CHF 1.02). Afterwards, regardless of how much the dollar falls against the franc, your account value will always be CHF 510,000.
You can do this as many times as you like, as frequently as you like.
Interactive Brokers denominates accounts in US dollars, euro, British pounds, Canadian dollars, Hong Kong dollars, Indian rupees, Japanese yen, Mexican pesos, Swedish koruna, Swiss francs, and Australian dollars. IB is US-based, so there is no disclosure paperwork to be filed with Uncle Sam. Update: IB charges a fee ($10) for inactivity, so check with them before you open an account.
Boom Securities denominates accounts in Hong Kong dollars, Singapore dollars, Australian dollars, US dollars, and Japanese yen; furthermore, Boom accounts pay interest on deposits. Update: Boom charges an annual fee of about $25.
Saxo Bank denominates accounts in Hong Kong dollars, British pounds, euro, Swiss Francs, Canadian dollars, Hungarian forint, Czech koruna, Norwegian koruna, New Zealand dollars, Singapore dollars, Turkish lira, Israeli shekels, South African rand, UAE dirhams, and Japanese yen; plus they can take credit card deposits from Visa and Mastercard.
Each of these brokerages is plugged in to the global financial system, so you can move funds to and from your brokerage account as easily as you can with your existing bank account. Furthermore, even though these brokerages are set up for trading, you can hold your capital in a variety of currencies without ever placing a single trade. Fees may apply.