Foreign currency deposit — Definition Explained Simply | Examples & Role
A foreign currency deposit is a bank deposit held in a currency other than the euro — for example, US dollars (USD), Swiss francs (CHF), or British pounds (GBP). It allows savers to earn interest in a foreign currency but comes with exchange rate risk.
What is a foreign currency deposit
A foreign currency deposit is a bank account or term deposit denominated in a currency other than the domestic one (euro). Common examples include deposits in US dollars, Swiss francs, British pounds, or Japanese yen. The customer deposits money in the chosen currency for a fixed or flexible period under agreed interest terms.
Main characteristics
Foreign currency deposits allow customers to hold and grow their savings in another currency, potentially benefiting from currency appreciation. However, they carry a currency exchange risk — if the foreign currency weakens against the euro, the actual return in euros may decline.
How it works
The mechanism is similar to a regular deposit: the customer deposits funds and earns interest, but both principal and interest are denominated in the foreign currency. At maturity, the funds can either remain in that currency or be converted back into euros at the prevailing exchange rate, which determines the effective return.
Interest rates and terms
Interest rates on foreign currency deposits are usually lower than on euro deposits, as foreign currencies pose additional risk for banks. The rate can be fixed (for fixed-term deposits) or variable (for demand deposits).
Foreign currency deposits in Germany
Many German banks — including Commerzbank, Deutsche Bank, and DKB — offer such products. For instance, Commerzbank provides a foreign currency term deposit (Termingeld in Fremdwährung) in USD or CHF with a fixed interest rate. The payout is made in the same currency. These deposits are mainly used for portfolio diversification and as a hedge against euro inflation.
Advantages and risks
- Advantages: Diversification, potential gains from currency fluctuations, protection against euro depreciation.
- Risks: Exchange rate losses, lower yields, possible conversion fees.
Deposit protection
Foreign currency deposits in Germany are protected under the national deposit guarantee scheme up to the equivalent of €100,000 per depositor and bank. This protection covers bank insolvency but not exchange rate fluctuations.
Examples
- A client deposits 10,000 USD for 12 months at 2 % interest — receives 10,200 USD; the euro value depends on the exchange rate.
- An investor holds a deposit in Swiss francs to hedge against euro inflation.
- A business keeps funds in USD to simplify international transactions.
When to choose a foreign currency deposit
This type of deposit suits clients with foreign currency income or payments and those seeking diversification. It is less suitable for short-term or low-risk investors sensitive to exchange rate changes.