Theres been a lot of talk in the last year about the US dollar being replaced as a reserve currency, in part because of all the bailouts and quantitative easing done to jump-start our economy. With all the recent economic forums, such as the G20 in Pittsburgh. its no surprise that this has been a topic of conversation.

So, we started looking at ways to diversify ourselves off the US dollar. Its possible that the dollar could be replaced as a reserve currency but more importantly, we realized that in the increasingly global economy, its dangerous to have all your money be from one country. Theres a reason why gold spiked to over $1,000 an ounce and its because people wanted stability.

However, if you dont want to own gold, are there other options? I think a foreign exchange currency CD might be a good idea. Before we make any decisions, we should do some research about them in the first place. Im going to use Everbank as an example because I already have a banking relationship with them and their website offers up a lot of good information about their products. For our review Ill use the MarketSafe BRIC Certificate of Deposit as the example.

Why a Forex CD?

The idea behind foreign exchange, or Forex, is that you get to trade you dollars for some other currency. When the exchange rate changes, you either gain money or lose money. The name of the game is trying to figure out the trends and buy other currencies when the dollar is worth more and sell them back when the dollar is worth less. If you were to get into it you would find its a little more complicated, but thats the gist.

Why a Forex CD? You get to dabble in foreign exchange currency trading without actually getting involved in any exchanging of foreign currency. More importantly, with this MarketSafe CD, you get to dabble in forex without putting any principal at risk. You get exposure to the B razilian real, R ussian ruble, I ndian rupee, and the C hinese renminbi currencies in the form of a three-year CD.

If you think the value of the dollar will fall relative to this basket of four currencies in three years, then youll want to deposit money into the CD. If you dont think it will, then you wont. Its as simple as that.

What is the Risk?

There is no risk that you would ever lose your principal with a MarketSafe CD but that doesnt mean you dont assume any risk. Inflation risk is the biggest problem you have to deal with. Lets say the dollar increases in value relative to the BRIC currencies, then you would earn 0% over three years. That doesnt sound bad right? Well, inflation, despite being 0.19% this last year, probably wont be 0%. Inflation would make your dollars, having been locked up for three years, worth less and less each year. This risk exists for any investment if you arent moving forward, youre moving backwards.

Anytime you invest your money, you want to compare your investment against a safe return. You have to decide whether you are getting enough in anticipated return to take on the risk you assume with that investment. A three year (36-month) certificate of deposit currently yields somewhere between 2.50% 2.80% APY, as of September 2009. Your principal is protected in the MarketSafe CD but your anticipated return has to at least beat your 100% safe alternative investment. If you were to earn 0%, youve actually lost 2.80% plus whatever inflation took out the back door.

Next Steps

For now were going to pass on the CD as we do some more research in the space. Im always hesitant to lock up anything for such a long time but a little bit of money might not be a bad idea just to get a little exposure. Do you have any experience in Forex or Forex CDs? Or have you been looking at ways to diversify outside the US? Any and all directions you can point me in would be very helpful!