Foreign currency investment from scratch: The complete guide to choosing the right currencies, timing the market, and achieving steady profits

Want to increase your asset returns by holding foreign currencies? Or do you want to diversify risk and protect your purchasing power? Foreign currency investment is becoming an increasingly popular choice among Taiwanese people. This article will guide you to a deeper understanding of how the foreign currency market operates and help you find the investment method that suits you best.

Basic Concepts of Foreign Currency Investment: Do You Really Understand?

Foreign Currency vs. Forex: A Small Difference with Big Impact

Many people confuse “foreign currency” and “forex,” but their meanings are actually different. Foreign currency refers to all foreign currencies other than the New Taiwan Dollar (NTD), including USD, JPY, AUD, etc. Forex, on the other hand, covers a broader range of assets denominated in foreign currencies, such as government bonds, bank deposits, bills of exchange, and more.

Simply put, foreign currency is just the currency itself, while forex encompasses various payment methods used in international transactions. Buying and selling foreign currency is just one form of forex trading.

Why Invest in Foreign Currency? Check Out These Advantages

• Profit Opportunities from Interest Rate Differentials: Taiwan’s fixed deposit rates are historically low, while major currencies like USD and AUD usually have higher interest rates. The interest rate difference is a potential profit.
• Hedging Against Currency Depreciation Risks: If all assets are valued in NTD, a sharp depreciation of the NTD will directly reduce their value. Holding multiple currencies can diversify this risk.
• Market Fairness: Participants in the foreign currency market are worldwide, making it harder to manipulate compared to stock markets, with higher transparency.
• 24/7 Trading Flexibility: The forex market operates 24 hours a day, unrestricted by fixed trading hours. You can stop losses at any time when prices move against you.

How Does Foreign Currency Make Money? Master the Key of Interest and Exchange Spreads

The returns from foreign currency investment mainly come from two parts: interest rate differentials and exchange rate differences.

Interest Rate Differential is the difference in interest rates between countries. For example, if Taiwan’s fixed deposit annual interest rate is 2%, and the US is 5%, the 3% difference is a potential profit. Holding USD fixed deposits can earn this interest differential steadily each year.

Exchange Rate Difference arises from fluctuations in exchange rates. If you buy USD at 33 NTD per USD but sell at 30 NTD per USD, the loss incurred is due to exchange rate difference.

The problem is, even if you earn a 5% interest, if the USD depreciates more than 5% during the same period, your overall investment still results in a loss. This is the classic mistake of “earning interest but losing on exchange.”

Therefore, before investing in foreign currencies, you must think clearly: do you want to earn stable interest income through long-term holding, or capture short-term exchange rate movements? Different goals lead to completely different investment strategies.

Comparison of Three Mainstream Foreign Currency Investment Methods

Taiwanese investors mainly have three options, each with its pros and cons:

Foreign Currency Fixed Deposit — The Most Stable Choice

This is the lowest-risk method: opening a foreign currency account at a bank and depositing funds directly. The advantage is safety and stability; you just wait until maturity to receive principal and interest. The downside is poor liquidity—if the exchange rate has already reached your target but the deposit hasn’t matured, early termination may incur penalties; if you use a savings account and wait, the interest earned is very low.

Suitable for: conservative investors with low risk tolerance who pursue stable cash flow.

Foreign Currency Funds — A Flexible Middle Ground

No contract signing needed; you can buy or sell at will, with much higher liquidity than fixed deposits. Banks assist with currency exchange, and you can adjust your holdings promptly as funds fluctuate. Common types include USD money market funds, currency ETFs, etc., with annual fees usually between 0.5% and 0.7%.

Suitable for: investors needing flexible operations and reacting to short-term market changes.

Forex Margin Trading — High-Yield, High-Risk Professional Choice

This method only profits from exchange rate differences, not interest. Using margin, investors can leverage small capital to enlarge trading scale, with 24-hour access. Of course, leverage is a double-edged sword—profits can be amplified, but losses can also be magnified. Industry recommendations usually limit leverage to no more than 30 times for major currency pairs.

Suitable for: experienced traders who understand risk mechanisms and can make quick decisions.

Why Do Taiwanese Prefer USD? The Logic of Different Currency Investments

Taiwanese banks typically offer 12 major foreign currencies, including USD, EUR, JPY, AUD, CAD, GBP, CHF, NZD, SGD, HKD, ZAR, SEK, etc. Each currency has its own characteristics, which must be understood before investing.

Policy-Driven Currencies — USD and EUR

The exchange rates of these currencies are mainly influenced by central bank monetary policies. When central banks adopt easing policies, the currency tends to depreciate; when tightening, it appreciates. The key to investing in these currencies is to closely follow central bank meetings and decisions.

USD, as the global settlement currency, holds an unshakable position. When investing in foreign currencies, USD is always the first choice, with other currencies fluctuating around the USD index.

Safe-Haven Currencies — JPY and CHF

These two countries have developed economies, stable political situations, and their central banks rarely adjust interest rates. Because of this, during global turmoil and rising risk aversion, investors flock to buy these currencies. Many even borrow in JPY for carry trades—borrowing low-interest JPY to invest in higher-yield assets elsewhere, then converting back to NTD when the economy improves, earning both interest and exchange rate gains.

Commodity Currencies — AUD and CAD

Australia mainly exports iron ore and coal; Canada mainly exports oil. This means their exchange rates are highly correlated with global commodity prices. When iron ore prices rise, AUD appreciates; when oil prices rise, CAD appreciates. Conversely, when commodity prices fall, these currencies weaken. For beginners, commodity currencies are relatively easier to understand because commodity price trends are easier to predict.

Emerging Market Currencies — RMB, ZAR, etc.

These currencies are attractive due to high interest rates, but also carry high risks. Political instability, volatile exchange rates, low liquidity, large bid-ask spreads—without careful analysis, you might “earn interest but lose on exchange.” Unless you have a strong grasp of the country’s situation, it’s best for beginners to avoid these.

Conclusion: Which Currency to Choose?

Safe-haven currencies (JPY, CHF) are stable and suitable as defensive assets. Commodity currencies (AUD) are easier to grasp and suitable for offensive strategies. USD remains the core holding. As for emerging market currencies, unless you have in-depth research, it’s advisable to stay cautious.

Five Major Factors Affecting Foreign Exchange Rates

To profit from foreign currency investments, you must understand what drives exchange rate changes:

Inflation Rate Differentials: Countries with low inflation see slower price increases in goods and services, maintaining stronger purchasing power, leading to currency appreciation. Countries with high inflation tend to see depreciation.

Interest Rate Policies: Rising interest rates attract foreign capital, increasing demand for the currency and pushing up its value. Central bank interest rate decisions significantly impact exchange rates.

Government Debt Levels: Countries with high debt levels struggle to attract foreign investment; market concerns can lead to capital outflows and currency depreciation.

Trade Conditions: Countries with rising export prices relative to import prices earn more foreign currency, increasing currency demand and appreciation.

Political Stability: Political turmoil, lack of judicial independence, policy uncertainty scare away foreign investors, causing currency depreciation. Conversely, stable political environments and strong rule of law tend to strengthen the currency.

Practical Operations: How Can Beginners Buy and Sell Foreign Currency?

After understanding the theory, it’s time to practice. Using forex margin trading as an example (because it best demonstrates the flexibility of foreign currency investment):

Step 1: Choose Your Trading Pair

Analyze the currency pair you want to trade—such as EUR/USD or USD/JPY—study the respective country’s central bank policies, interest rate trends, main exports, economic data. Decide whether to go long or short.

Step 2: Develop a Trading Plan

Define your entry point, stop-loss, and take-profit levels. How much loss are you willing to accept? At what profit level will you close the position? These must be decided before placing orders and should not be changed impulsively.

Step 3: Execute Strictly

Place orders when the market moves according to your plan. Wait patiently when it doesn’t. Never chase highs or sell in panic. Avoid making rash decisions just because others are making money or because of temporary losses.

Step 4: Continually Optimize

Every trade is a lesson. Record your decision process and results, analyze what was correct and what was wrong. Improve your strategy through practice.

Golden Rules for Investing in Foreign Currencies

1. Don’t Trade If You Don’t Understand

The foreign exchange market is complex, but the most predictable and largest-volume currencies are USD, JPY, etc. Beginners should focus on 1-2 currencies rather than blindly trading obscure ones.

2. Constantly Monitor the Market

Exchange rates are always changing, influenced by news, economic data, central bank moves, etc. Regularly check international financial news sites (like Bloomberg, CNBC) to stay updated and adjust your strategy timely.

3. Diversify Your Portfolio

Don’t put all your chips into one currency. You can hold USD fixed deposits, AUD funds, and trade JPY margin positions simultaneously, creating a complementary portfolio to spread risk.

4. Use Stop-Loss and Take-Profit Wisely

The biggest mistake in forex trading is “aiming for big gains but reluctant to stop-loss.” Small losses can turn into big ones or even wipe out your account. Discipline is key—set your stop-loss levels and stick to them, don’t be soft.

5. Seize Entry Opportunities

The simplest and most effective entry signal is waiting for a trend to form. Exchange rates don’t go straight up or down; they form trends amid fluctuations. Once a clear trend appears, it’s a safer entry point. Limit yourself to about 2 trades per day to give yourself time to think calmly.

6. Practice with Demo Accounts

Before risking real money, repeatedly practice in a demo environment. Test your strategies with virtual funds, understand the real market operation, and only invest real money when you’re confident.

Final Advice

There’s no absolute winning formula in foreign currency investment, but basic principles of success exist. Understanding market logic, choosing suitable investment methods, maintaining discipline, and continuous learning—these are the keys to steady profits.

The value of foreign currency investment is not only in pursuing high returns but also in protecting your assets through multi-currency allocation. In a low-interest-rate era, holding a certain proportion of high-interest foreign currencies can earn interest rate differentials and hedge currency risks. Start now—seize the opportunity of foreign currency investment.