Foreign Currency Investment Beginner's Guide: Master Exchange Rate Fluctuations and Use the Right Strategies to Earn Stable Profit Margins

Want to increase your asset returns through foreign currency investment but don’t know where to start? This article will guide you through the core mechanisms of foreign currency investment, mainstream investment methods, and how to avoid risks and accurately seize trading opportunities. If you’re a beginner, this comprehensive guide will help you establish the correct concept of foreign currency investment.

As a small open economy, Taiwan has long faced pressure of currency appreciation and a low interest rate environment. In this context, allocating assets into foreign currencies has become an inevitable choice for many investors. According to central bank data, the amount of foreign currencies held by Taiwanese people continues to grow, with mainstream currencies like USD, JPY, and AUD being the most popular.

Foreign Currency Investment vs Forex Trading: Clarifying the Concepts

Many people often confuse the definitions of “foreign currency” and “forex.” Simply put, foreign currency refers to all foreign currencies other than the domestic currency, while forex is a broader concept that includes foreign currencies, government bonds, deposit certificates, and other assets denominated in foreign currencies.

From an investment perspective, foreign currency investment usually refers to holding foreign cash or deposits, whereas forex trading encompasses currency pair trading, forward contracts, margin trading, and more. Beginners should first understand this distinction to choose the investment tools suitable for themselves.

How Can Beginners Profit from Foreign Currency Investment? Mastering Two Main Sources of Income

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

Interest rate differential income refers to the interest earned by holding high-interest-rate currencies. For example, if the US fixed deposit annual interest rate is 5%, and Taiwan’s fixed deposit is only 2%, the 3% gap is the interest differential. Many beginners like to earn interest through fixed deposits or currency funds, which are relatively stable but offer limited returns.

Exchange rate difference income comes from currency fluctuations. When you exchange 33 TWD for 1 USD, and later the USD appreciates to 35 TWD, the change in exchange rate alone can bring gains. However, exchange rates can also fall, which is the biggest risk in foreign currency investment.

It’s important to note that investors often make the mistake of “earning interest rate differential but losing on exchange rate.” Even if the USD fixed deposit interest is 5%, if the USD depreciates more than 5%, overall losses will occur. Therefore, before starting foreign currency investment, you must clarify your investment goal—whether to pursue stable interest income or to profit from short-term exchange rate fluctuations.

Three Mainstream Ways for Foreign Currency Beginners to Invest

For those wanting to invest in foreign currencies, Taiwanese investors mainly have three options:

1. Foreign Currency Fixed Deposit — Stable but Low Liquidity

Foreign currency fixed deposits are the simplest investment method, which can be operated directly after opening a foreign currency account at a bank. The advantages are low risk and stable returns, but the disadvantages include poor liquidity and low interest rates. Early termination may result in some interest being deducted by the bank.

In the current low-interest environment, annual interest rates for foreign currency fixed deposits range from 2% to 5%, still better than the average 1.7% for TWD fixed deposits. Suitable for conservative investors with low risk tolerance who seek stable income.

2. Foreign Currency Funds — Flexibility and Returns

Foreign currency funds (including money market funds and currency ETFs) offer high liquidity, can be bought and sold at any time, and are not bound by fixed deposit lock-in periods. Investors can purchase directly with TWD, with the fund company handling currency exchange. Returns come from dividends and exchange rate differences.

The management and custody fees for common foreign currency funds total about 0.5% to 0.6%. The additional costs compared to fixed deposits are offset by higher liquidity and flexible operations. This method is suitable for beginners who need to adjust their asset allocation regularly.

3. Forex Margin Trading — High Returns, High Risks

Forex margin trading is preferred by professional investors. By leveraging (usually 50x to 200x), investors can participate in the 24-hour global forex market with a small amount of capital. Returns are entirely from exchange rate differences, not interest.

Advantages include: 24-hour trading, low transaction costs, and low entry barriers. However, leverage also amplifies risks. Wrong judgments can lead to rapid losses or even margin calls. Therefore, forex margin trading is only suitable for experienced traders with strong risk awareness.

Why Invest in Foreign Currencies? Four Core Reasons

Reduce Exchange Rate Risk: If all assets are denominated in TWD, when TWD appreciates, foreign currency assets will passively depreciate. Holding multi-currency assets can diversify exchange rate risks.

Interest Rate Arbitrage: Different countries have significant interest rate gaps. Holding high-interest-rate currencies can earn interest premiums. Especially in Taiwan’s long-term low interest rate environment, foreign currency investment offers better returns.

Market Fairness and Transparency: The daily trading volume of the forex market exceeds 5 trillion USD, with hundreds of millions of participants worldwide, making price manipulation nearly impossible. Compared to stock markets, forex markets are more fair.

24-Hour Continuous Trading: Unlike stock markets with fixed trading hours, the forex market operates 24 hours a day. Investors can close positions or cut losses at any time, greatly reducing overnight risks.

How to Choose Foreign Currencies? Understanding the Four Major Currency Categories

There are many tradable foreign currencies globally, but only about 12 are truly relevant for beginners. Based on different influencing factors, they can be divided into four categories:

Policy Currencies: USD and EUR

These currencies’ exchange rates mainly depend on central bank policies. Decisions by the Federal Reserve and the European Central Bank, quantitative easing, and other policies directly impact exchange rates. Investing in these currencies requires close attention to central bank meeting schedules and policy statements.

Currently, since the Fed started a rate cut cycle in September 2024, it has cut rates by a total of 100 bps. The ECB maintains a relatively stable policy stance. Policy divergence has led the euro to strengthen against the dollar, reaching a four-year high.

Safe-Haven Currencies: JPY and CHF

Japan and Switzerland have stable economies and low political risks. Central banks rarely adjust interest rates. During global turmoil, investors tend to buy these “safe-haven” currencies to hedge risks.

The Japanese yen faces pressure due to expectations of Bank of Japan rate hikes and narrowing US-Japan interest differentials. The Swiss franc attracts capital inflows amid uncertain US economic prospects, causing its exchange rate to continue rising. These currencies are suitable for risk-averse investors.

Commodity Currencies: AUD and CAD

Australia and Canada’s economies mainly rely on commodity exports. When commodity prices rise, these countries need more local currency to purchase the same amount of goods, pushing up the exchange rate. Conversely, when prices fall, the opposite occurs.

For example, Australia is the world’s largest iron ore exporter. From 2021 to 2024, iron ore prices continued to decline, and the AUD depreciated accordingly. The trend of these currencies is relatively predictable, making them suitable for beginners to analyze technically and trade.

Emerging Market Currencies: RMB, ZAR, etc.

Emerging market currencies often offer higher interest rates but come with high political risks, volatile exchange rates, and poor liquidity. Investors may earn interest differential but be wiped out by exchange rate movements, so caution is advised.

For example, the South African rand has an interest rate above 8%, but political instability and poor liquidity lead to large bid-ask spreads. Investing in such currencies requires extra risk assessment.

Which Currencies Should Foreign Currency Beginners Choose?

Considering the current global economic environment, beginners should prioritize policy currencies and commodity currencies, while using safe-haven currencies as a defensive asset allocation.

USD: The world’s primary settlement currency, with the best liquidity and relatively stable volatility. The Federal Reserve’s policy stance is the most important reference.

EUR: The second-largest reserve currency globally, with EUR/USD being the most traded currency pair. The European Central Bank maintains an independent monetary policy, which is relatively stable.

AUD: Highly correlated with commodities like iron ore and copper, with clear technical features, suitable for trend trading.

JPY: Prominent as a safe-haven currency, often seeing capital inflows during market risk surges. Carry traders also frequently use JPY as a funding currency.

Six Major Factors Driving Exchange Rate Fluctuations

To profit from foreign currency investments, understanding the core factors influencing exchange rates is essential:

Inflation Rate Differential: Currencies of countries with low inflation tend to appreciate. When inflation is well-controlled, prices of goods and services rise slowly, attracting foreign capital.

Interest Rate Levels: Higher interest rates attract foreign investment, increasing demand for the currency and pushing up its value.

Government Debt: Countries with high debt levels are less attractive to foreign investors, leading to long-term currency depreciation.

Trade Balance: Increased exports boost demand for the currency, appreciating its value. Rising commodity prices can also improve export conditions.

Political Stability: Countries with low political risk attract more foreign investment, leading to currency appreciation. Political instability can cause capital outflows.

Economic Data: Employment figures, GDP growth, manufacturing indices, and other economic indicators influence exchange rates. Investors should regularly monitor key economic releases.

Five Practical Tips for Foreign Currency Beginners

Focus on Mainstream Currencies: Avoid obscure currencies. The most traded currencies—USD, EUR, JPY, GBP—have high liquidity and ample information.

Continuously Monitor Exchange Rate Fluctuations: Currency rates fluctuate daily due to market, economic data, and geopolitical factors. Subscribe to international financial news to stay informed.

Diversify Asset Allocation: Don’t concentrate all funds in a single currency. Hold a mix like USD fixed deposits, AUD funds, JPY hedges to form a balanced portfolio.

Set Stop-Loss and Take-Profit: Discipline is crucial in forex margin trading. Set reasonable stop-loss (e.g., 2% loss of initial capital) and take-profit points to avoid emotional trading and margin calls.

Confirm Entry Timing: Avoid chasing highs or selling lows. Prepare a trading plan in advance, wait for clear trends before entering. Usually, observing price movements over 5 minutes or more helps confirm trend direction.

Important Considerations and Risk Management for Foreign Currency Beginners

Although foreign currency investment offers attractive returns, risks should not be underestimated. Beginners should keep in mind:

Avoid Over-Leverage: Even if forex platforms offer high leverage, control it within 30x initially. High leverage amplifies both profits and losses.

Don’t Add to Losing Positions Out of Frustration: When facing losses, some traders increase leverage or add positions to recover. This often leads to margin calls or liquidation.

Regularly Review Holdings: Fixed deposits or funds should be periodically checked to see if exchange rate movements meet expectations. Adjust strategies promptly if fundamentals change.

Learn Fundamental and Technical Analysis: Understanding central bank policies, economic data, and mastering chart analysis, moving averages, etc., can significantly improve decision quality.

Start Small and Practice: No matter how complete your theoretical knowledge, real trading experience is invaluable. Start with small amounts or demo accounts to build discipline and market feel.

Foreign currency investment is an important part of long-term asset allocation. As long as you master the correct methods and maintain risk awareness, beginners can achieve stable returns in this market.