[PB Notebook] The Heyday of Foreign Currency Deposits Has Arrived

Daesu Kim, Head of PB Team, Shinhan PWM Yeouido Center

Last year, dollar deposits were popular, and this year, yen deposits are in demand. When the US base interest rate was maintained at the 1% level, holding dollars did not make dollar deposits particularly popular. This was because the interest rates were low and the exchange rate was relatively stable, so there was no need to buy and accumulate dollars in advance.

However, the situation is different now that the COVID-19 pandemic period has ended and the US has sharply raised its base interest rate. Dollar deposits, which exceed 5% annually, have attracted great popularity among investors.

While stock or bond products can be volatile and may incur negative losses, dollar deposits carry no risk of principal loss. Additionally, the fact that they are fixed interest rate products is an advantage.

Moreover, because the US base interest rate is maintained much higher than Korea’s base interest rate, there has been a slightly higher preference for dollar deposits over Korean won time deposits.

Recently, dollar deposits remain popular. Unlike the slight decline in time deposit interest rates at major domestic commercial banks due to expectations of economic slowdown and base rate cuts, dollar interest rates have continued to maintain the 5% range.

So, should customers who do not currently hold dollars exchange their money into dollars and subscribe to deposits now? To conclude, there is no need to rush to a decision. It is fine to purchase some in parts for asset portfolio diversification, but if you exchange at a high won-dollar exchange rate and then subscribe to dollar deposits, you might incur losses from exchange rate fluctuations if the exchange rate falls later.

As with all foreign exchange transactions, foreign currency involves the variable of exchange rates. In other words, no matter how high the interest rate is, losses can occur if the exchange rate declines. For example, Brazilian bonds are fixed interest products with rates in the 10% range. However, due to the sharp decline of the Brazilian real, customers who subscribed when the real was high are currently experiencing losses.

For customers who do not want to experience the FOMO (Fear Of Missing Out) syndrome with foreign currency deposits, why not consider yen deposits instead? Of course, Japan has maintained a zero (0) interest rate policy for a long time, so deposits do not provide separate interest.

Therefore, it is necessary to approach from the perspective of exchange gains. Since the formula "100 yen = 1000 won" has long been recognized, the current yen exchange rate of around 900 won per 100 yen is certainly low.

Exchange rates change in real time due to various factors such as economic and political situations, so it cannot be judged that the current rate is the lowest point. However, considering it is about 10% discounted compared to the appropriate exchange rate, if it recovers to around 950 won, a return of about 5% can be expected. This is close to the 5% level of dollar deposit interest rates. Since yen deposits do not pay interest, it is also a good idea to keep them in a deposit account with withdrawal and deposit flexibility rather than a fixed-term deposit.

Besides high interest rates and low exchange rates, the biggest attraction of foreign currency deposits is that exchange gains are tax-exempt. Foreign currency generally has a difference in amount when buying and selling. The exchange gains generated at this time are not taxed. For example, if you buy dollars at 1100 won and sell them at 1300 won, the 200 won exchange gain is not subject to separate tax. Similarly, if yen purchased at the low 900 won level rises and is converted back to won, the gain is tax-exempt income.

Of course, caution is needed. Since exchange rates have many variables, there is no guarantee that the rate will move in the expected direction, and it may fall further than when purchased. Therefore, be careful not to invest money with a fixed purpose and period hastily and then be unable to retrieve funds on time.

Finally, foreign currency deposits can be withdrawn in cash by paying a certain cash handling fee. Foreign currency deposits are basically traded in telegraphic transfer amounts without physical transactions. However, if cash is needed for reasons such as travel, it is usually possible to withdraw cash by paying a 1.5% fee, so this option can also be utilized.

News is coming that the US base interest rate has almost reached its peak. Existing dollar deposit holders are checking their maturity dates again and planning to reinvest long-term before the dollar deposit interest rates fall.

Also, customers who want to buy yen in advance before the US base interest rate falls and the yen value starts to rise are increasing. Considering the relatively high interest rates and exchange gains, foreign currency deposits, which have been steadily attracting interest since last year, still appear to be a good investment destination.

This content was produced with the assistance of AI translation services.