f you have bank deposits like a savings account or certificates of deposit, you have chosen to put at least a portion of your money in secure, conservative investments. While this takes away some of the risk of investing in more active vehicles, it does not eliminate risk altogether. It also does not mean you are insulated against economic events in the world at large.

A recent example: pronouncements by three of the four "BRIC" countries (this stands for Brazil, Russia, India, and China) that they are seeking ways of diversifying away from U.S. dollar-denominated securities. You may think that your quiet deposit accounts couldn't be further removed from the intrigues of international finance, but interest-bearing accounts are sensitive to risks involving interest rates and inflation. Like it or not, this brings the actions of those BRIC countries very much to your doorstep.

Interest Rate and Inflation Risks

By investing in deposit accounts, you've sought to protect yourself against losses in the value of those accounts, and to earn interest on the amount invested. While you've protected yourself against the risk of losing principal, you are susceptible to two other kinds of risk:

• Changes in interest rates. As you've no doubt been strongly reminded over the past couple years, a decline in interest rates means that your income on these accounts will decline. With short-term interest rates less than 1% per year, this risk has gone farther than most people probably thought possible. On the other hand, if interest rates rise, you'll see your income increase.
• Increases in inflation. Because there is no growth component to deposit accounts, inflation poses a risk to the purchasing power of those accounts. It also diminishes the value of any interest earned. The flip side, as seen over the past year, is that if prices actually decline, these accounts get a boost to purchasing power in addition to any interest earned.

From a tactical standpoint, the more you are concerned about the first risk--falling interest rates--the longer you will try to lock up today's interest rates. So, for example, you might choose multi-year certificates of deposit over a savings account. On the other hand, the more you are concerned about inflation risk, the less you want to lock into a fixed rate of interest. The interest rate on savings accounts will be able to adjust more quickly to a rise in inflation than if you are locked into a certificate of deposit for multiple years.

Interest Rates, Inflation, and the Dollar

At a recent regional economic conference, Russian President Dmitry Medvedev called for an alternative to reliance on the U.S. dollar as a global currency. This means that three of the four BRIC countries have expressed similar goals, with Brazil and China joining Russia in challenging the supremacy of the dollar. As a group of large nations with fast-growing economies, the BRIC countries are a global economic force to be reckoned with for years to come.

A challenge to the dollar could mean higher interest rates and higher inflation for the U.S. If you are concerned about this, it's time to worry more about inflation risk than the risk of falling interest rates. In other words, you may want to favor savings accounts over long-term certificates of deposit.

Sources: 

Vladimir Isachenkov • Russia challenges dollar, China offers loans • Jun 16, 2009 • http://www.yahoo.com • http://finance.yahoo.com/news/Russia-challenges-dollar-apf-15534139.html?sec=topStories&pos=4&asset=&ccode=