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DBS USD fixed deposit at 4.55% p.a! Is foreign currency fixed deposit better than SGD fixed deposit?

29 Nov 2022

Before we decide between foreign currency fixed deposit and SGD fixed deposit, we should think about foreign exchange risks.

With rising interest rates, fixed deposit (FD) is trending once again. 

There are two main types of fixed deposit – foreign currency fixed deposit and Singapore dollar (SGD) fixed deposit. 

For SGD fixed deposit, the best fixed deposit rate you can get from the local banks is at 3.90% from UOB. 

For foreign currency fixed deposit, the best rate is 4.55% from DBS foreign currency fixed deposit.

Now, you might be thinking to put your money into the latter since it offers a higher interest rate.

This may not necessarily be the case. Read on to find out more!

How does a foreign currency fixed deposit work?

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Source: DBS

Foreign currency fixed deposit works the same way as your usual SGD fixed deposit, except that your funds are held in foreign currency such as USD, GBP, HKD etc. 

You have to put in funds in a foreign currency with the bank and you will earn interest rates in that particular foreign currency. 

For example, you put in USD with DBS as a foreign currency fixed deposit, and DBS will pay you interest in USD at the agreed rate.

There are a few things to note –

  • There is a foreign currency conversion fee charged whenever you convert SGD to foreign currency and vice versa. Spoiler alert: This fee is not cheap. 
  • You will need a multi-currency account to deposit your funds in foreign currencies.
  • You might not get a return of 4.55% if you are looking to convert your funds in foreign currency back to SGD.

Should you choose foreign currency fixed deposit since it pays a better interest rate?

I know, the DBS Foreign Currency FD 4.55% is very attractive since it is higher than the latest yield on the Singapore 6-month T-Bill. 

However, you should beware of foreign currency risk (FX risk).

If you are looking to convert your funds in foreign currency back to SGD after the end of the FD cycle, you need to care about FX risk.

Understanding FX risk when deciding between foreign currency vs SGD fixed deposit

Let’s assume you have SGD$ 20,000 and would like to put it into a 12-month 4.55% DBS foreign currency FD to earn a higher interest rate. 

First, you would have to convert the SGD$ 20,000 to USD.

At the end of 12 months, you will have to convert the principle + interest back into SGD.

If you think that you might be getting SGD$20,910 (inclusive of the 4.55% interest) … nope

You might be wrong. 

The truth is, you may or may not get it. 

It depends on the FX rate at which you exchange your currency at.

Source: SGD to USD Yahoo exchange rates

FX rates fluctuate over time.

If SGD appreciates against the USD after 12 months, chances are you will get back less SGD per US dollar. 

This means that your return will be less than 4.55%. 

Too chim? Let me use numbers and show you an illustrative example.

TimeAmount you haveRemarks
Initial fundsSGD$20,000 
Convert to USD FX USD$14,300Assume FX rate = 0.715 SGD/USD
After 12 monthsUSD$14,950.654.55% interest = US$650.65
Convert back to SGDSGD$20,622Assume FX rate = 0.725 SGD/USD
 

Total interest earned = $622

Return = 3.11% 

Tada. 

This is why you may not get the 4.55% return from the DBS foreign currency fixed deposit.

In this example, you might be better off putting your money into an SGD fixed deposit.

It really depends on the FX rate at when you first convert it to foreign currency and when you convert your foreign currency back to SGD.

Does this mean that foreign currency fixed deposit is not meant for everyone?

The answer is no. 

You can still consider the product in the following circumstances:

  • You have an existing holding of USD and/or have spending in USD
  • You have holding power and do not mind keeping the USD until you are able to get a good exchange rate

Otherwise, I do not see any point in putting your money into a foreign currency fixed deposit. 

Should I pick DBS foreign currency fixed deposit or OCBC foreign currency fixed deposit? 

If you are aware of the FX risk and know how to manage it, you might be asking if there is a “better” bank for foreign currency fixed deposit.

I will go with “whoever pays me better”. 

Just because I am an opportunistic (or kiasu) Singaporean. 

At the current DBS and OCBC rates, I think I will pick the DBS foreign currency fixed deposit because it pays me 4.55% while OCBC only offers 4.35% (note: this is for fixed deposit of less than USD $100,000). 

Source: DBS 

Why does USD foreign currency fixed deposit offer a higher interest rate than the GBP/AUD foreign currency fixed deposit?

If you have noticed, USD foreign currency fixed deposit offers the highest interest rate now.

This is because interest rates in the US are higher than in the UK and Australia. 

If I am not looking to convert my foreign currency back, I will probably pick the one with the highest interest rate and put my money in there. 

Final verdict on foreign currency fixed deposit VS SGD fixed deposit

There are always risks when it comes to investing.

Please always exercise due diligence and do not fall prey when people tell you this product pays better.

There is a reason why it pays better.

The product may be good for some people but may not necessarily be suitable for everyone.

If you want to know where to find the latest best fixed deposit rates, you can always join me in Beansprout’s Telegram group and discuss more. 

I know, some of you might prefer T-Bills to fixed deposit since T-Bills are backed by the government. straightforward

If that is the case, you should be sure you understand what competitive bids are, especially for the upcoming issuance. 

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