Foreign Currency Savings Calculator (Local vs Dollar Deposit)

How it works

Local deposit = amount × (1 + local rate)ʸ · foreign deposit = amount × (1 − cost ÷ 2) ÷ S₀ × (1 + foreign rate)ʸ × S₀ × (1 + depreciation)ʸ × (1 − cost ÷ 2) · break-even depreciation = (1 + local rate) ÷ (1 + foreign rate) × (1 − cost ÷ 2)^(−2 ÷ years) − 1

Saving in a stronger foreign currency such as the US dollar or the euro protects you if your local currency loses value, but local deposits usually pay more interest to compensate for that risk. The break-even depreciation is the yearly loss of value at which both choices end up equal: if you expect the local currency to weaken faster than that, the foreign deposit wins; if slower, the local deposit wins. In theory the interest-rate gap already reflects the expected depreciation (uncovered interest parity), so the decision comes down to whether you expect a bigger devaluation than the market does — and to how much the exchange spread costs you.

Worked example

Saving 100,000 for 2 years: a local deposit at 10% grows to 121,000. Converting at 20 per dollar with a 1% total exchange cost buys 4,975 dollars, which grow at 4% to 5,380.96; if the local currency depreciates 5% a year the rate reaches 22.05 and, after the selling cost, the dollars are worth 118,056.92, so the local deposit wins by 2,943.08. The break-even depreciation is 1.10 ÷ 1.04 ÷ 0.995 − 1 = 6.30% a year (an exchange rate of 22.60), so saving in dollars only pays if you expect a faster devaluation.

Sources: Wikipedia — Interest rate parity · IMF — Exchange rates: what are they?

Frequently asked questions