Interest rates in the United States, although they've climbed a wee bit in the past month or so, are still the lowest they've been in decades. That's wonderful if you're looking to refinance a home or buy a new car. But it's a horror to those -- including millions of older Americans -- who count on monthly income from their certificates of deposit (CDs), savings accounts, or money market funds.

Wouldn't it be nice to find a three-month CD not paying the typical paltry 1.28 percent but rather 12.8 percent in interest? Well, you can. Right now, you can buy a three-month CD denominated in South African rands paying 12.8 percent interest. Or you can purchase a three-month CD denominated in Mexican pesos paying 8.24 percent. Or you can buy CDs denominated in pound sterling, Canadian dollars, or euros, all of which are paying higher interest rates than your everyday domestic vanilla CDs. 

To boot, the Federal Deposit Insurance Corp. (FDIC) insures all of those foreign-currency CDs. At least one bank offering them -- Everbank of St. Louis, largely an Internet operation -- is part of First Alliance Bank in Jacksonville, Fla., one of the largest financial institutions in this country.

There must be a catch, you say. It's too good to be true, you say. 

You're right on both counts.

Here's the hook. You invest by converting your dollars into a certain foreign currency. At the end of three months, six months, or a year, you must then convert that foreign currency back into dollars. Ah, but at that point, the exchange rate may have changed. If the foreign currency has raised vis-à-vis the dollar -- in other words, if the dollar falls -- you come out ahead. 

As it happens, the dollar of late has been falling like jungle rain. In the past year, it has lost about one-third of its value against most other currencies of the world. As a result, investors in Everbank's New Zealand CDs got 31.72 percent on their money in 2002. That figure represents what they earned in interest, plus what they got on the currency exchange fluctuation. Investors in euro-based CDs earned 18.5 percent, and lucky investors in the South African rand-CD got 44 percent on their money! 

The numbers for 2003 so far are looking just as sweet, but should the dollar start to rise, all the numbers you see above would flip-flop just as quickly as you can say "sucker." Keep in mind FDIC insurance protects you against bank insolvency, not against currency risk. Yes, you could lose a good chunk of your principal. You could lose almost all of it. 

So for anyone considering investing in a foreign CD, the question of the hour is this: Will the dollar continue to fall, or will it rise? 

According to Frank Trotter, president of Everbank, a further decline of the dollar is almost inevitable. He cites political and economic forces -- from U.S. involvement in the messy Middle East and the ballooning budget deficit to a serious imbalance in international trade and mounting household debt, which will continue to force the dollar to its knees. 

Furthermore, he adds that the dollar's sways historically have moved in several year cycles. The current downward slide only began about a year and a half ago. 

Some experts feel otherwise. Michael Hyman, founder of the international consulting firm Global Financial Risk Solutions and author of The Economics of Business in the 21st Century: New International Rules-New Global Risks (South-Western, 2003), states steadfastly, "No way would I be playing in the currency CD market. Although there are many ostensible reasons why the dollar should go down, I wouldn't bet 2 cents that it will. You just never know." 

Hyman explains high interest rates in a particular country such as South Africa or New Zealand indicate the currency is weak and will fall against the dollar, not rise.

Roger Ibbotson, professor of finance at the Yale School of Management in New Haven, Conn., and chairman of Ibbotson Associates, an investment data and consulting firm based in Chicago, says predicting which way the dollar will go is very difficult, but some people consistently do make money at it. 

"But those who win at the speculation game are the professional traders who follow currencies minute by minute, day by day," he adds.

Of course, if you could latch onto the coattails of a professional trader, you might stand to profit. Ian Kelson, an international bond expert for the investment management firm T. Rowe Price that's based in Baltimore, Md., says he and his staff of researchers can often spot opportunities where interest rates are high, but the currency seems to be holding its own. 

"Right now, we like Canada," he says. "The government is taking a very tough stand on keeping the Canadian dollar strong." 

Kelson manages T. Rowe Price's International Bond Fund, a collection of foreign government and corporate bonds that returned 21.80 percent in 2002 and seems to be doing honky dory this year. Just as with the foreign CDs, Kelson acknowledges the fortunes of his bond fund are tied closely to the ups and downs of the greenback. Here, too, you could make a killing, or take a beating.

Financial planner Frank Armstrong, president of Investor Solutions in Coconut Grove, Fla., and author of The Informed Investor (AMACOM, 2002), isn't too crazy about international bonds or CDs. 

"Fixed income investments, such as bonds and CDs, have historically returned much less [less than half as much] as stocks," he says. "They belong in a person's portfolio only to dampen risk. That's why you should choose them for safety and predictability. By taking on foreign risk in your fixed investments, you effectively defeat their whole purpose." 

Nonetheless, if you have a few extra pennies -- money you absolutely don't need to pay the bills -- and you want to take a gamble in currencies, go ahead, and have a ball. Just realize what you're getting into, precede gingerly, and if you lose, don't blame us.

(Originally printed in AARP Magazine, July 2003)