To save or not to save in US dollars

QUESTION: With the US dollar moving downwards and the Jamaican dollar gaining strength at this time, do you think it is prudent to start saving in US dollars? Which is better: to start a US dollar fixed -income account, or a regular savings account? If one is able to do so, would that be a wise move?

- Angela

PFA: There are many reasons for opening foreign-currency accounts. Whether you open one or not depends on what you want to achieve. You should have good reasons for doing so and not be led to do so because it is the fashionable thing to do.

Let us look at some good reasons for opening a foreign-currency account. A foreign-currency account is one means of hedging against the loss of value of your local currency.

You benefit by getting more local currency in your hand when you convert from foreign-currency to local currency if the latter has devalued. The interest earned on the account gives the same benefit.

Risk management

Some persons opt to place funds in foreign-currency accounts if they can get a higher rate of return than is available on local-currency accounts. Others do so as a means of diversifying their portfolio. This is a risk-management strategy.

Exporters may retain some of the foreign currency they earn in such accounts to facilitate payment for raw materials and other expenses incurred in foreign currency to produce for export. Importers also keep foreign-currency accounts to have better control over access to foreign currency to meet the costs of business payable in foreign currency.

It is good business practice to keep these funds in interest-earning accounts until they are required.

Persons who have payments to make in foreign currency now or in the future often opt for foreign-currency accounts.

Among those doing so are individuals whose children are attending school abroad or those intending to send children to school in a foreign country. Individuals who incur debts in foreign currency may also find such accounts attractive to have foreign currency readily available to service their debt. The same is true of businesses.

Companies that expect to or actually remit dividends to their parent companies abroad may also keep such accounts.

But there are risks. Exchange rates may move unfavourably for people and companies that hold foreign-currency accounts. Because of the situation you have described, holders of US dollar accounts get fewer Jamaican dollars now if they convert to Jamaican dollars, whether it is the principal or interest that they are converting.

Even in situations in which the local currency is devaluing against a foreign currency, it is necessary to compare interest rates being paid on local-currency accounts and on foreign-currency-denominated accounts. The differential could be so significant in favour of the local currency that it is more advantageous to keep funds in it.

Let us look at rates being offered by a local commercial bank:

US dollar savings:

100-24,9990.60%25,000-49,9990.80%

Jamaican dollar regular savings:

10,000-99,9991.00%100,000-249,9992.25%250,000-499,9992.75%

US dollar fixed deposits:

1,000-19,99920,000-49,999

1-2 months1.25%1.40%3-6 months1.40%1.55%7-12 months1.50%1.60%

Jamaican dollar fixed deposits:

20,000-249,999 1,000,000-4,999,999

1-2 months 4.00% 5.00%

3-6 months 4.75% 5.75%

7-12 months 4.80% 5.80%

Rates on fixed-deposit accounts (not fixed-income accounts as sated in your question) tend to be higher than rates on savings accounts.

Saving in a currency that is losing value and paying lower rates is not the course usually taken by persons desiring to get the best returns from their funds, unless they expect some meaningful turnaround in one or both conditions in the short term.

Oran A. Hall, principal author of 'The Handbook of Personal Financial Planning', offers free advice and counsel on personal financial planning.finviser.jm@gmail.com