What Are Foreign Currency Banks
If you're an American, you might wonder what foreign currency banks are all about. Most of us are pretty used to depositing our dollars and having them held as dollars until we withdraw them as ... dollars. But what if you're concerned about the future worth of the dollar. What if (heaven forbid) the worth of the dollar goes down at a rate that is larger than the rate at which your investments are growing? Then your money isn't just not working for you -- it may be losing for you!
When the dollar or other domestic currencies show extra volatility, many people opt to "hedge" their dollars by holding them in a different currency. For example, if you believe that financial indicators suggest that the dollar will go down over the next, say, 18 months against the Japanese yen, then it would make sense to convert your dollars into yen, hold them as yen, and then withdraw them 18 months later. If your prediction is correct, your yen will be worth more dollars than before, because of the way this currency has performed against the dollar. It's for exactly this purpose that you would want to look into foreign currency banks.
Put another way, with foreign currency banks, you can hold your money in whatever currency you want (or is allowed), as a hedge against the inflation you would expect from your native currency. Back before the United State's current financial woes, many people in other economies were holding their own money in dollars, because the dollar was a strong currency against their own domestic monetary system. Today, investors everywhere are seeing what's happening in the US -- horrible overspending, the Fed printing money left and right, QE 1 and 2 and 3 -- and deciding that perhaps the dollar might not be the best currency right now. It may be that a few years from today, the dollar will again be on stable ground. But for now, lots of investors are hedging against inflation by converting their dollars to other types of currency.
In order to find the best foreign currency banks, you will probably have to go "offshore." There are just too many regulations and difficulties within the US, Canada and other primary economies to really do a good job with foreign currencies. But in certain countries, the tax and regulatory climate is such that this type of activity isn't just permitted -- it's actually encouraged. Finding the right offshore bank to work your currency magic is an important first step toward meeting your own financial goals.
When the people in charge make foolish decisions that impact your bottom line, it's not difficult to get around them. Simply move your domestic currency into a more stable currency through the services of foreign currency banks, and you'll be better protected in the short term and in the long run!
