Foreign Currency Investment Beginner's Guide: Master Exchange Rate Fluctuations and Choose the Right Investment Method

Looking to earn returns through foreign currency investments? But don’t know where to start? Actually, foreign currency investing is not as complicated as it seems. This article will comprehensively introduce you to the core concepts, main methods, currency classifications, and practical tips for foreign currency investment, helping you find your own investment opportunities in the foreign exchange market.

Why is foreign currency investment worth paying attention to?

In an environment where the average annual interest rate for NT$ bank fixed deposits is only 1.7%, foreign currency investment is recommended as an important option for asset allocation. Foreign currency investment offers four major advantages:

Low barrier and high convenience: Simply open a foreign currency account at a bank or operate through online platforms. The application process is straightforward, and once the account is opened, you can buy and sell foreign currencies.

Diversify risk and protect assets: If all assets are denominated in a single currency, wealth will significantly diminish when the domestic currency depreciates. Holding multiple foreign currencies can effectively diversify exchange rate risk, especially important during geopolitical instability or economic fluctuations.

More fair and transparent trading: Investors worldwide participate in foreign currency trading, with a large market size that is difficult for a single entity to manipulate, making it more fair compared to stock markets.

24-hour continuous trading: The forex market operates around the clock. Investors can stop losses and exit at any time when prices are unfavorable, offering more flexibility than fixed stock trading hours.

Comparing the three main methods of foreign currency investment

To enter the foreign exchange market, you need to choose suitable investment tools. The following three methods each have their own features:

Foreign Currency Fixed Deposit — A Stable Income Choice

Foreign currency fixed deposits are the simplest and lowest-risk way to invest in foreign currencies, mainly aiming to earn bank deposit interest. The process is straightforward: open a foreign currency account at a bank, deposit funds, and choose a fixed-term product. The interest is automatically credited.

Advantages: Safe and stable, suitable for beginners.

Disadvantages: Limited liquidity; if the exchange rate reaches your target but the deposit hasn’t matured, early withdrawal may incur interest deductions. Additionally, the low savings account interest rate results in modest returns.

Foreign Currency Funds — A Flexible Middle Ground

Foreign currency funds are a good tool balancing capital flexibility and returns. They do not require long-term commitments and can be bought or sold at any time. The returns are between savings and fixed deposits. Investors can use TWD to invest, with fund companies handling currency exchange, earning from interest and exchange rate differences.

Common products include money market funds and currency ETFs, with fees typically around 0.5% to 0.6%. These are especially suitable for investors needing liquidity but wanting to earn foreign currency returns.

Forex Margin Trading — High Risk, High Reward

Forex margin trading aims for pure exchange rate gains, not interest income. Due to relatively low currency volatility, leverage of 50 to 200 times is often used to amplify gains.

How it works: Similar to stock trading, investors analyze exchange rate trends (fundamental or technical analysis) to choose entry points. The key difference is that the forex market operates 24 hours, with T+0 mechanisms, very low entry barriers, and the ability to trade major currency pairs globally with minimal margin via online platforms.

Risk warning: Leverage is a double-edged sword. While it can magnify gains, it also amplifies losses. ASIC, the Australian regulator, recommends leverage for major currency pairs be below 30x. Investors must choose leverage wisely and set strict stop-loss points to avoid margin calls.

How to make money with foreign currencies: dual gains from interest spread and exchange rate difference

Profits from foreign currency investments come from two sources: interest spread and exchange rate difference.

Interest spread refers to the difference between benchmark interest rates of different countries. For example, Taiwan’s fixed deposit rate is 2%, and the US rate is 5%, making a 3% potential profit margin.

Exchange rate difference arises from buying and selling currencies, capitalizing on exchange rate movements and trading time differences. For instance, if you buy USD at 33 TWD and USD appreciates to 35 TWD, you profit from the exchange rate difference.

Beware of the trap “earn interest spread but lose on exchange rate”: Suppose you earn 5% interest on USD but the USD depreciates, resulting in principal loss. The overall investment could still be unprofitable. Therefore, before trading, clarify your goal—are you pursuing long-term interest income or short-term arbitrage? Also, thoroughly assess exchange rate risks and develop solid risk management strategies.

Recommended foreign currencies: four categories and selection logic

Taiwan banks generally offer about 12 major foreign currencies for investment, including USD, AUD, CAD, HKD, GBP, CHF, JPY, EUR, NZD, SGD, ZAR, and SEK. These currencies are driven by different factors and can be classified into four categories:

1. Policy-driven currencies — USD and EUR

Exchange rates are mainly influenced by central bank policies. USD and EUR trends are highly related to their respective central banks’ monetary policies, quantitative easing, or interest rate decisions. Easing policies usually lead to currency depreciation, while tightening policies push the exchange rate higher.

The key to investing in these currencies is to closely follow central bank policy announcements and content.

2. Safe-haven currencies — JPY and CHF

These two countries have developed economies and political stability, with central banks rarely adjusting interest rates. During turbulent times or economic downturns, investors tend to buy these currencies for safety. Many traders even borrow in these currencies for carry trades, then convert back to profit when the economy improves.

3. Commodity currencies — AUD and CAD

These currencies are highly correlated with commodity prices. Australia is the world’s largest iron ore exporter; when iron ore prices rise, the AUD usually appreciates, and vice versa. CAD is closely linked to oil prices.

For beginners, commodity currencies are relatively easier to understand in terms of trend logic, suitable for trend-following strategies.

4. Emerging market currencies — RMB, ZAR, etc.

From developing countries, these currencies often have higher interest rates, attracting high-interest spread investors. However, they tend to be volatile, with significant exchange rate risks, lower liquidity, and wider bid-ask spreads. Caution is advised to avoid earning high interest but losing on exchange rate fluctuations.

Core logic for choosing currencies: Don’t just look at fixed deposit interest rates; also evaluate exchange rate stability and international liquidity. USD, EUR, AUD are relatively stable and popular among investors. For beginners, foreign currency investment is recommended to combine safe-haven and commodity currencies, balancing risk diversification and trend capture.

Five major factors influencing exchange rate fluctuations

Understanding what drives exchange rate movements is fundamental to successful foreign currency investing. The main factors include:

Inflation rate: Countries with low inflation tend to see their currencies appreciate, as prices for goods and services rise slowly, maintaining purchasing power. High inflation countries tend to see their currencies depreciate and often have higher interest rates.

Interest rates: Rising interest rates attract foreign capital inflows, pushing the currency higher. Central bank rate hikes often lead to currency appreciation.

Government debt: Countries with high government debt are less attractive to foreign investors; foreign exchange investors may sell bonds, leading to currency depreciation.

Trade conditions: Rising export prices relative to import prices indicate improved trade terms, which can appreciate the domestic currency. Export-driven economies like Australia are particularly affected.

Political stability: Countries with low political risk attract more foreign investment, boosting their currency. Political turmoil tends to cause depreciation.

Latest trend analysis of major currency pairs

EUR/USD(

This is the most traded currency pair globally, influencing the entire forex market. Recently, the Fed has cut interest rates, while the European Central Bank maintained rates and expressed optimism about economic prospects, pushing the euro to a four-year high. Markets believe US policy uncertainty has increased, and the ECB’s monetary policy remains relatively independent, making the euro a relatively stable choice.

) USD/JPY###

The yen is often used as a funding currency for carry trades. The Bank of Japan has paused interest rate hikes to counter US tariffs, but most economists expect a rate hike before year-end. Divergence in US-Japan policies has narrowed interest rate differentials, but domestic political uncertainties in Japan still influence the market. In the short term, USD/JPY is expected to remain volatile.

( GBP/USD)

The British pound has strengthened this year, mainly driven by a weak US dollar and improving UK fundamentals. As Fed policies become clearer, the pound faces re-pricing risks. Considering the UK’s sluggish economic growth and rate cut expectations, the pound is likely to remain range-bound with no strong upward trend.

USD/CHF(

The Swiss franc is a popular safe-haven asset due to its stability and neutrality. As US economic difficulties emerge, the dollar’s safe-haven appeal diminishes, and the Swiss franc appreciates. In the medium to long term, US economic slowdown and Fed rate cuts are expected to continue supporting the Swiss franc.

Practical steps for beginners in foreign currency investment

) Step 1: Clarify investment goals and risk tolerance

Define whether you aim for long-term interest income or short-term exchange rate arbitrage, and the maximum loss you can tolerate. This will directly influence your choice of investment method.

Step 2: Select target currencies

Analyze the economic fundamentals of the target country—policy, interest rates, export products—to judge the trend. For example, if US is expected to cut rates while Japan remains unchanged, consider going long JPY/USD.

( Step 3: Develop trading strategies

Set entry and exit points, stop-loss and take-profit levels, and consider transaction costs. A good strategy effectively controls risk and improves profit chances.

) Step 4: Choose suitable platforms or banks

Ensure the trading institution is safe, charges reasonable fees, offers comprehensive tools, diverse products, and quick execution.

Step 5: Start with demo or small amounts

Practice trading strategies, evaluate their effectiveness and risk control in real market conditions. Accumulate experience before gradually increasing investment.

Practical tips for foreign currency investment: five core recommendations

1. Invest only in currencies you understand

Beginners should focus on the most traded major currencies like USD, JPY, etc., avoiding over-diversification.

2. Keep an eye on exchange rate movements

Exchange rates fluctuate frequently, influenced by market, economic, and news factors. Regularly read international financial media (e.g., Bloomberg, CNBC) to stay informed.

3. Diversify your portfolio

Combine different investment methods, such as USD fixed deposits with AUD funds, to hedge various risks. Once a suitable allocation is found, avoid frequent trading.

4. Learn to set stop-loss and take-profit

Especially in margin trading, stop-loss is crucial. Place stops at key support levels; if the price breaks, automatically close to prevent margin calls. Take profits when the trend stalls. Limit daily trades to no more than 2 times.

5. Seize entry opportunities

Never chase highs or sell on dips. Develop a plan beforehand, and only place orders when the timing aligns. The simplest approach is to wait for a trend to form, usually over 5 minutes. Depending on your trading style, you can choose 30-minute or 120-minute timeframes as references.

Conclusion

In a low-interest-rate environment, foreign currency investment has become a popular choice for many investors. Mastering exchange rate dynamics, choosing the right investment methods, developing solid strategies, and maintaining continuous learning and discipline are key to steady profits in the foreign exchange market. Remember, any strategy requires practice and testing. Start small, gradually accumulate experience, and find your own rhythm in foreign currency investing.