Euros, dollars or sterling: what are the most rewarding currency strategies for those with offshore bank accounts?

Over the opening five weeks of 2013, spooked largely by predictions of a triple-dip recession for the UK, sterling-to-euro exchange rates swung by over 7 cents. This means that someone making, say, a €1,000,000 currency transfer that straddled that period – to buy a house, provide funding for a new venture or some similar lump sum transaction – would have found themselves around £66,000 worse off.

Just a little less painful would have been a sterling-to-dollar transaction over the same period: against a backdrop of an averted fall from the 'Fiscal Cliff' and a strengthening US economy, sterling lost 5 cents against the dollar. The potential loss: close to £32,000.

What that underscores to anyone outside of the world of professional currency trading is how movements within foreign exchange markets can have a corrosive effect on their assets – with high levels of volatility and unpredictability presenting a particular challenge to those whose income, financial commitments and, indeed, residencies are spread internationally.

“People who have a mixture of income and outgoings in foreign currencies need to keep on top of currencies movements, which can be an onerous undertaking,” says Vimal Popat, an expert on forex markets and director of VPFX Consulting.

One way to ease such a burden is to use the flexibility of offshore bank accounts in key locations such as the Channel Islands or the Isle of Man. Barclays, for instance, offers its international banking customers the option of operating offshore accounts in any mix of sterling, dollars and euros. In many cases, such customers own or might be looking to buy property in the UK; they could have school/student fees or other commitments to pay in sterling or dollars; and may be receiving income from previous investments, shares, pensions or salaries from a diverse range of countries.

Spreading the risk

Since it is impossible to predict exchange rate movements with any accuracy, spreading funds across sterling, euro and dollar accounts might reduce the risk of being caught out by any sudden swings. While currency diversification can help to tame such risk, it has a practical benefit too. For those with income and outgoings in the same currency, it can eliminate the burden of exchange costs that result from the gap between currency buying and selling rates.

“If you have income in dollars, it makes sense to have a dollar account for your dollar payments, and the same for other major currencies,” observes David Pearce, FX specialist at Barclays International. “That’s far more preferable than going through a transfer every time you need to make a payment.”

Multiple currency accounts can be beneficial to those with an international wealth profile.

A multi-currency offshore account can also make hedging against swings in currency easier. For those looking to transfer a lump sum in the near future, perhaps to buy a property in the UK, the use of a forward contract that fixes the exchange rate at a given point can remove a significant degree of uncertainty – though not always. The biggest challenge is knowing when to commit on such a contract, but it is possible to set a target price for exchanging the money, bracketed by lower and upper thresholds.

Indeed, online currency tools, such as the Barclays iAlert service, can help by automatically notifying customers as soon as their target price is reached. Provided the exchange rate is still suitable, it is then a case of making the transfer or buying the forward contract at that preset level.