Say, for instance, that you invest $20,000 in a one-year CD denominated in British pounds and it pays 5 percent interest. You give your $20,000 to EverBank and the bank converts it to pounds at the going exchange rate. A year later, you have $1,000 in interest, but your entire account is denominated in British pounds. But to spend that money in the U.S., you need to exchange the pounds back into dollars.
If the British pound has gained against the U.S. dollar, you get a double benefit -- a return on the currency swing as well as on your investment. If the pound has gained by 5 percent against the dollar during that period, you come home with $22,050 -- a 5 percent return on your initial $20,000 investment, plus a 5 percent return on the $21,000 you're converting into U.S. dollars.
If, however, the British pound slides in value against the dollar, you could end up with a loss -- despite the investment income. If the pound loses 10 percent, for example, you have just $18,900 -- the $21,000 you had in pounds minus the currency exchange loss of 10 percent, or $2,100.
Don't want to risk losing any of the money in your CD? EverBank also has a hybrid product that will allow you to bet on the currencies of Brazil, Russia, India and China as a group, without risking your principal.
Called the BRIC CD, it allows you to deposit as little as $1,500 and get 100 percent of the upside of the appreciation of those currencies without any risk to your initial investment. At worst, your CD will be worth the amount of your initial deposit at maturity.
The downside: It's a three-year commitment and there's no getting your money back early, said Chuck Butler, president of EverBank World Markets. The only instance that they'll pay out early is if you die and your estate has asked for the cash, he said.
In addition, the CD doesn't earn interest. The return is based solely on the appreciation of those securities against the dollar. Your return is based on the notion that you put 25 percent of your initial investment in each currency. If they gain, on average, you win. If they don't, you earn nothing -- but lose nothing.
More popular are the bank's single-currency CDs, particularly those that are tied to "commodity currencies," Butler said. Commodity currencies are those issued by countries that attribute a substantial portion of their gross domestic product to agriculture, oil or precious metals, he explained.
Those countries, such as Australia, New Zealand, Brazil and Canada, are expected to do well in an inflationary environment.
But Weiss believes that buying commodity currencies is chasing last year's returns -- a risky strategy that's as likely to be a loser as it is to produce a profit.
In fact, he likens betting on one country's currency to betting on one stock. It's just too risky for the average investor.
He prefers the idea of investing in a broadly diversified basket of currencies. That, he says, is smart for your entire portfolio.
Adding a modest amount of foreign exposure to your portfolio has been shown to increase returns while actually lowering risk, because foreign currencies are not closely correlated to the U.S. stock or bond markets, he notes. That makes your entire portfolio a little more stable.
"Over one to three years, we think foreign currencies are likely to be a return enhancer," Weiss said. "It allows you to not only sidestep inflation and dollar devaluation but take advantage of it."