A foreign currency account is a bank account whose balance is kept in a currency other than the local currency of the country where the account is held, or other than the holder's home currency. A US dollar account at a bank in Karachi, a euro account at a bank in London and a pound account held by an Indian exporter are all foreign currency accounts. Deposits, withdrawals and interest are recorded in that currency rather than being converted on arrival.
Foreign currency accounts are a long-established banking product, used by exporters, migrants and their families, and anyone who earns, saves or spends in another currency. They differ from a multi-currency account, which bundles several currencies under one relationship, though the two overlap. In countries with exchange controls, who may open one, what money may go into it and how it may be used are set by the central bank.
Foreign currency account in plain terms
Suppose you live in one country but are paid in another country's money. Every time a payment arrives, your bank could change it into local money at that day's rate, and change it back whenever you need to pay something abroad. Each swap costs a little and the rate keeps moving. A foreign currency account lets you keep the foreign money as it is, in its own box, until you decide what to do with it.
In countries where the local currency loses value quickly, that box is also a way to protect savings, which is why governments watch these accounts closely.
How foreign currency accounts work
The bank holding the account keeps a matching balance in the foreign currency, usually in a nostro account with a correspondent bank in that currency's home country, such as a dollar account at a bank in New York. Incoming transfers arrive by SWIFT or a regional rail; outgoing payments travel the same way. Cash withdrawals in foreign notes may be limited or charged, since banks must import and store the notes. Interest, where paid, follows rates in the currency's own market rather than local rates. Converting to local currency happens at the bank's exchange rate, which includes an FX spread.
Rules in selected countries
- India. Resident individuals generally cannot keep foreign currency balances in India freely. Exporters may credit part of their earnings to Exchange Earners' Foreign Currency (EEFC) accounts; returning residents can use Resident Foreign Currency accounts; non-resident Indians use FCNR(B) foreign currency term deposits alongside rupee NRE and NRO accounts. Under the Liberalised Remittance Scheme, residents may send up to $250,000 a financial year abroad, including to accounts held overseas.
- Pakistan. Residents and non-residents may open foreign currency accounts with banks under State Bank of Pakistan rules. After the nuclear tests of May 1998, the government froze foreign currency deposits and allowed withdrawals only in rupees, an episode that still shapes trust in these accounts.
- Nigeria. Foreign currency accounts are known as domiciliary accounts and are widely used by importers and households.
- United States, United Kingdom and euro area. There are no general restrictions on holding foreign currency accounts at domestic banks, though they are less common for consumers.
Why people and firms use them
- Trade. Exporters receive export proceeds and pay import bills in the same currency, reducing conversion costs and foreign exchange risk.
- Remittances. Families receiving remittances can keep money in dollars or other hard currency until it is needed.
- Saving. Where local inflation is high, foreign currency deposits serve as a store of value, a feature of partial dollarization.
- Travel, study and property abroad. Individuals pay tuition, rent or mortgages overseas without repeated conversion.
Risks, tax and reporting
Holders face several risks. The exchange rate can move against them when they eventually convert. Governments facing a balance-of-payments crisis can restrict withdrawals, force conversion at an official rate or freeze balances, as Pakistan did in 1998 and Argentina did in 2001–2002. Deposit insurance may not cover foreign currency deposits, or may pay out only in local currency. Large dollar deposits can also create a currency mismatch for banks that lend in local currency.
A separate meaning of "foreign account" arises in tax law. Accounts held at banks outside a person's home country may trigger reporting: US persons must file a Report of Foreign Bank and Financial Accounts (FBAR, FinCEN Form 114) if their foreign accounts together exceed $10,000 at any time in the year, and foreign banks report US account holders under FATCA. Banks also apply KYC and source-of-funds checks to large foreign currency inflows to manage money laundering risk.