Foreign Exchange Rate Investment Beginner's Guide: Profit from Exchange Rate Difference or Interest Rate Difference? Comparison of Three Investment Methods

Many people want to invest in foreign currencies but don’t know where to start, and are even unclear whether they want to profit from interest rate differentials or exchange rate differences. Foreign currency investment may seem simple, but there are many nuances. This article starts from basic concepts to help you clarify the core logic of foreign currency investing.

First, clarify: what is the difference between foreign currency and foreign exchange?

Many people confuse “foreign currency” and “foreign exchange,” but they are fundamentally different.

Foreign currency refers to currencies other than the currency of your own country. For example, in Taiwan, anything other than New Taiwan Dollar (TWD) is foreign currency—such as USD, JPY, AUD, etc.

Foreign exchange is a broader concept, referring to international payment methods in the form of foreign currencies, including bank deposits, government bonds, stocks, and various other assets.

Simply put: buying and selling foreign currencies is a type of foreign exchange trading; foreign currency is a subset of foreign exchange.

How to make money investing in foreign currencies? There are only two core logic types

The profit methods for investing in foreign currencies can be summarized into two terms: exchange rate difference and interest rate difference.

Exchange rate difference refers to the profit or loss caused by fluctuations in currency exchange rates. For example, if you exchange 33 TWD for 1 USD, and after USD appreciates, you exchange back at 36 TWD, the 3 TWD difference is the exchange rate difference.

Interest rate difference is the gap between the benchmark interest rates of different countries. For example, if the US deposit rate is 5% and Taiwan’s is only 2%, the 3% interest rate difference represents potential profit.

But the key point is: You might earn interest rate difference but lose on exchange rate difference. This is a common pain point for many beginners—interest income from USD is received, but due to USD depreciation, overall still results in a loss. Therefore, before investing in foreign currencies, you must think clearly: are you aiming for short-term exchange rate gains or long-term interest rate differentials?

Three types of foreign currency investment methods, suitable for different groups

1. Foreign Currency Fixed Deposit—The Easiest Starting Point

Foreign currency fixed deposits are the lowest risk method. Simply open a foreign currency account at a bank and deposit money to earn interest. If you’re over 20 and have ID, you can do it—process is straightforward.

Advantages: Lowest risk, suitable for those purely seeking interest rate difference.

Disadvantages: Poor liquidity; early withdrawal may incur interest penalties; and if the exchange rate moves unfavorably, even high interest can’t offset exchange rate losses.

2. Foreign Currency Funds—More Flexibility

Foreign currency funds include money market funds and currency ETFs. No lock-in period—buy when you want, sell when you want.

Compared to fixed deposits, fund interest rates are between savings and fixed deposits but much more flexible. If you think a certain exchange rate level is unfavorable, you can exit immediately without being locked into a term.

Features: High liquidity, relatively low fees (usually 0.5%-0.6%), suitable for investors wanting some flexibility without high risk.

3. Forex Margin Trading—High Returns, High Risks

Pure exchange rate trading, ignoring interest, focusing solely on currency fluctuations. Due to small volatility, leverage is used to amplify gains, typically 50-200x.

Advantages: 24-hour trading, T+0 mechanism, low entry barrier—only a small margin needed to participate.

Risks: Leverage is a double-edged sword; losses are also magnified. The key is to learn proper stop-loss strategies; otherwise, one wrong judgment can lead to liquidation.

Which foreign currencies do Taiwanese people love to invest in?

Taiwan banks usually offer 12 currencies: USD, EUR, JPY, GBP, AUD, CAD, CHF, HKD, SGD, NZD, ZAR, SEK.

These currencies can be categorized into four types based on their characteristics:

Policy currencies (USD, EUR): Exchange rates mainly influenced by central bank policies. When the Fed cuts rates, USD tends to weaken; ECB maintains a strong stance, EUR remains relatively firm. Investing in these currencies requires paying attention to central bank moves.

Safe-haven currencies (JPY, CHF): These countries have stable economies and low political risk. During global instability or economic downturns, investors flock to these currencies for preservation of value. Many also use them for carry trades—borrowing low-interest currencies to invest in high-interest ones, then converting back when conditions improve.

Commodity currencies (AUD, CAD): These countries mainly export commodities. Rising iron ore and oil prices cause their currencies to appreciate; falling commodity prices lead to depreciation. For example, AUD is highly correlated with iron ore prices, which is why many beginners prefer starting with AUD—its trend is relatively easier to grasp.

Emerging market currencies (CNY, ZAR): High interest rates but volatile and less liquid. The temptation to earn interest rate differential is high, but policy changes can quickly wipe out gains.

Currency selection advice: Beginners are recommended to start with highly liquid, relatively stable major currencies like USD, EUR, AUD, avoiding high-risk, high-reward currencies like ZAR initially.

Five major factors influencing exchange rate fluctuations

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

1. Inflation rate: Countries with low inflation tend to see their currencies appreciate. The reason is simple—low inflation means stronger purchasing power, making the currency more valuable.

2. Interest rate levels: Higher interest rates attract foreign capital inflows, causing currency appreciation. High US rates strengthen the dollar; Japan’s long-term low rates weaken the yen.

3. Government debt: Countries with high debt levels tend to depreciate. Foreign investors worry about debt crises and may sell bonds, weakening the currency.

4. Trade balance: Countries with strong exports see their currencies appreciate, as overseas buyers need to purchase the local currency to pay for goods, increasing demand.

5. Political stability: Countries with political turmoil tend to see their currencies weaken. Investors avoid political risks and move funds to more stable nations.

How should beginners start currency trading?

Step 1: Choose your target currency pair. Don’t invest blindly—study the underlying logic. For example, if you believe the Fed will cut rates while the Bank of Japan stays put, consider going long JPY/USD. Trading decisions must be based on fundamental understanding.

Step 2: Develop a trading strategy. Include entry and exit points, stop-loss and take-profit levels, and consider transaction costs and market risks. Trading without a plan is gambling.

Step 3: Pick the right timing. The biggest mistake is chasing highs or selling lows. Prepare a plan in advance; wait for a clear trend to form before acting. Usually, a trend takes 5 minutes or longer to establish.

Step 4: Manage your mindset. Market volatility is normal. Avoid emotional trading. Stay calm during losses, and know when to take profits.

Step 5: Practice with demo accounts. Don’t risk real money immediately. Use demo funds to test your strategies and verify their effectiveness in real trading.

Five points to note when investing in foreign currencies

1. Avoid currencies you don’t understand. There are many currencies, but the most traded and manageable are major pairs—USD, JPY, EUR, AUD. Beginners should start with these.

2. Keep an eye on exchange rate fluctuations. Forex markets change rapidly; economic data, central bank decisions, geopolitical events all influence rates. Follow international financial news—CNBC, Bloomberg, investment websites are good sources.

3. Diversify your holdings. Don’t put all your chips into one currency. Hold USD fixed deposits, AUD funds, and combine different investment methods across currencies to hedge risks.

4. Learn to set stop-loss and take-profit orders. Especially in margin trading, stop-loss is vital. Limit yourself to a maximum of 2 trades at a time; avoid frequent in-and-out.

5. Don’t chase highs or sell lows. The easiest way to lose money is emotional trading. Wait for clear trends or stay on the sidelines; don’t be scared by short-term volatility.

Which foreign currencies are good to invest in now?

Since late 2024, the Fed has entered a rate-cut cycle. The European Central Bank remains relatively hawkish, causing the EUR to strengthen against the USD, even reaching a four-year high.

EUR/USD has been a focus because it involves the two largest economies—any small fluctuation can impact the entire forex market. However, as US economic data change, this pairing will continue to have more variables.

USD/JPY is becoming complex due to potential Japanese rate hikes. With the Fed cutting rates and Japan possibly raising rates, the narrowing interest rate differential supports the yen. But domestic political uncertainties in Japan remain, so this pair may stay volatile in the short term.

GBP/USD has performed well this year, mainly due to a weak dollar rather than GBP strength. The UK economy is sluggish, and rate cut expectations persist, so the GBP’s future trend is unlikely to be a one-way rally.

USD/CHF is worth watching. As global uncertainties rise, the Swiss franc’s safe-haven value becomes prominent. US economic slowdown and expectations of Fed rate cuts support the Swiss franc.

Overall, for beginners, it’s best to choose major currency pairs with good liquidity and clear fundamentals. Avoid high-interest emerging market currencies, as those risks are not suitable for novices.

Most importantly: clarify whether you want to profit from interest rate differentials or exchange rate differences, and choose your investment method accordingly. Fixed deposits suit long-term steady gains, funds offer flexibility, and margin trading is for experienced traders. There is no one best way—only the way that suits you best.