Devaluation And Exchange Control: Foreign Investment Risks

by David Jenyns on February 25, 2008

Investing in overseas markets can be tempting, especially if the exchange rate works well in your favor. The peseta had just been devalued. We had 50 percent more buying power. But if we had deposited $3.00 in a Spanish bank prior to the devaluation, we would have received a deposit credit for 120 pesetas, whereas if we wanted to bring our money home after the devaluation our 120 pesetas would buy only $2.00.

The dollar was devalued from $28 per ounce of gold to $35.

A person who deposited $28 in a foreign country could’ have brought back $35. The rumor that such devaluation might take place was no doubt responsible for a great deal of the money flow out of the United States to other countries.

Exchange control is the final worrisome factor in investing abroad. Since the foreign exchange situation in a country can change in a matter of months, you must keep up with foreign currency news in any country in which you invest.

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