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Author: WendyBG Big gold star, 5000 posts Top Favorite Fools Top Recommended Fools Feste Award Winner! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35379  
Subject: Re: Dollar hedging Date: 4/30/2006 11:25 AM
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I bought some currency CDs from Everbank, last year. It was easy to deal with them.

Send them dollars. They send you a statement that shows you the value of your CD, in the foreign currency. They subtract a fixed percentage (I believe it was 0.75%, which seems reasonable). The statement shows the maturity value of the CD, in the foreign currency. However, you will not know the value, in dollars, until the maturity date.

You can roll over the CD, or you can take out the money, at maturity.

Everbank will send you a 1099-INT, showing your interest, both in the foreign currency, and in dollars. You report the dollars, as taxable interest.

So far, it is straightforward.

The tricky part comes, with changes in currency valuations. I originally invested in the New Zealand, Australian, and South African currencies, because they had been rising against the dollar, and had been paying high interest rates. Since all of these are resource-based exporters, and commodities were rising, I thought that the currencies would at least hold their own. The Daily Pfennig (Everbank's currency newsletter) said that rising U.S. interest rates wouldn't cause a rise in the dollar -- they called this "Stupid Interest Rate Talk," which they jovially abbreviated as SIRT.

Unfortunately, I believed them. The dollar rose, in 2005, as the Fed raised interest rates. The "interest rate talk" wasn't "stupid." It determined the value of the dollar.

The dollar rose against all foreign currencies. I more than lost, in currency drop, what I made, in interest. I ended up reporting a capital loss (it's important to keep good records of every CD, for reporting beginning and end values, on your 1040 Form D).

Bottom line: currency moves are complex. There is more to them than inflation. On the day that you enter your order, there will be a complex picture of both currencies, including their economic situation, their growth and inflation rates, comparative movements in both of their interest rates, future expectations. Any changes from the expected future condition will cause changes in the currencies.

Like you, government talk about devaluation of the dollar makes me want to contact Everbank again. However, this time, I am more cautious.

Does the government really want to devalue, or is it just jawboning? Is the Fed really finished (or almost finished) raising interest rates? Will inflation really stay low? What about the central banks of the foreign country(ies)? Is it safer to invest in a low-yield, low-inflation country, or a higher-yielding country? What direction will the foreign country take? Interest rates? Foreign debts/reserves? Economy?

It's a lot more complicated than I realized, last year.

Wendy
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