Global Foreign Currency Asset Allocation Guide: How Beginners Can Master the Key Tips of International Currency Investment

Why Invest in Foreign Currency Asset Allocation?

In the era of financial asset diversification, holding a single currency has become an outdated investment approach. Many investors overlook a key risk: if all assets are denominated in the domestic currency, a significant depreciation of the home currency will lead to a decline in overall wealth. Historically, the Ukrainian currency almost lost its value after geopolitical conflicts, serving as a wake-up call for all investors.

From a macro asset allocation perspective, engaging in international currency investments offers multiple advantages:

High Market Transparency: Global foreign currency trading participants are located worldwide, making it difficult for any single force to manipulate currency trends. Compared to stock markets, foreign currency trading provides a fairer trading environment.

Relatively Low Entry Barriers: Opening a foreign currency account requires no complex procedures. It can be done at a bank counter or via an app, allowing direct participation in buying and selling.

24/7 Trading Mechanism: The forex market is the largest financial market globally, operating 24 hours a day. Investors can stop losses at any time if price movements turn unfavorable, without being restricted by fixed trading hours.

Clear Diversification Effect: When domestic interest rates remain low for an extended period, holding high-yield currency assets can effectively hedge against currency depreciation risk.

Foreign Currency and Forex Trading: Clarifying Concepts

Many beginners easily confuse the concepts of “foreign currency” and “forex.” Simply put, foreign currency refers to all foreign currencies other than the domestic currency, including banknotes and coins, which is a specific form of forex.

Forex, on the other hand, is a broader term. It encompasses all assets held by a country expressed in foreign currencies and various payment tools used for international settlement, including bank deposits, government bonds, promissory notes, deposit certificates, and other securities. In other words, foreign exchange trading involves buying and selling foreign currencies, and currency trading is the most direct form within forex trading.

In the forex market, investors focus on exchange rate fluctuations of various currency pairs and select the most valuable assets for allocation through analysis.

Two Main Sources of Investment Returns: Interest Rate Differentials and Exchange Rate Differentials

For newcomers to the foreign currency market, understanding the profit mechanisms is crucial. The returns on international currency assets mainly come from two aspects:

Interest Rate Differential: This is the profit derived from the difference between benchmark interest rates of different countries. For example, currently, Taiwan’s fixed deposit average annual interest rate is about 2%, while the US fixed deposit rate reaches 5%. The 3% gap constitutes a potential profit source.

Exchange Rate Differential: Profiting from timing the buy and sell based on fluctuations in exchange rates at different times. Investors buy at lower exchange rates and sell at higher rates to gain the spread.

However, these two sources of profit are not entirely independent. Beginners must beware of a common trap: “Earning interest but losing on the exchange rate”.

Suppose you exchange NT$33 for 1 USD and earn 5% interest on USD during the period, but eventually, if the USD depreciates to only NT$30 per USD, the overall investment results in a loss. This illustrates that exchange rate fluctuations often outweigh interest gains. Therefore, before investing, you must clarify whether you aim to earn interest through long-term holding or capture exchange rate differences through short-term trading, and develop appropriate risk management strategies accordingly.

Choosing and Comparing Three Main Investment Methods

In the Taiwan market, foreign currency asset allocation mainly offers three options:

Foreign Currency Fixed Deposit: Best suited for risk-averse investors. No leverage risk, purely earning fixed deposit interest. The process is simple: open a foreign currency account, deposit, and wait for interest accumulation. The downside is low liquidity; if the exchange rate reaches your target but the fixed deposit has not matured, early termination will deduct interest, often resulting in opportunity costs exceeding expectations.

Foreign Currency Funds and ETFs: Characterized by moderate risk and moderate returns. Investors can purchase directly with their local currency, with the fund company handling currency exchange. No fixed-term contracts are needed, and trading is flexible. Common products include USD money market funds (management fee ~0.5%) and USD index ETFs (~0.6%), with interest rates typically between savings and fixed deposits, offering a balanced flexibility and return.

Forex Margin Trading: Suitable for high-yield seeking investors, but with increased risk. This method does not earn interest, focusing solely on exchange rate differences. Using leverage of 50-200 times, investors can control large positions with small capital. Trading is similar to stocks, requiring analysis of exchange rate trends and timing. Its advantages include 24-hour trading, T+0 mechanism, and very low entry barriers. The core risk lies in leverage—excessive leverage can lead to rapid margin calls, so strict stop-loss discipline is essential.

Each method has its characteristics. Beginners should choose based on their risk tolerance, trading experience, and capital. If aiming for stable interest income, fixed deposits or funds are reasonable; if experienced and willing to accept higher risks, margin trading may offer higher returns.

Classification and Characteristics of Major Global Currencies

Major currencies in the international forex market can be divided into four categories, each with its own driving factors and investment traits:

Policy-Driven Currencies (USD, EUR)

These currencies’ exchange rates are closely linked to central bank policies. Loose policies typically lead to depreciation, while tightening policies push rates higher. As the world’s two most influential reserve currencies, policy shifts in USD and EUR can trigger chain reactions in the forex market. Key to investing in these currencies is closely monitoring central bank meetings and policy signals.

Safe-Haven Currencies (JPY, CHF)

Known for economic and political stability, these countries’ central banks rarely adjust interest rates, and domestic policies rarely cause drastic fluctuations. During global turmoil or economic downturns, investors tend to flow into these currencies for safety. Interestingly, investors often use these currencies for interest rate arbitrage—borrowing low-interest JPY or CHF to invest in high-yield assets, then converting back during economic recovery to realize both interest and exchange rate gains.

Commodity-Linked Currencies (AUD, CAD)

These economies rely heavily on commodity exports. Australia is the largest iron ore exporter, and Canada is a major oil exporter. When commodity prices rise, these countries need more local currency for transactions, driving up their exchange rates; when prices fall, the opposite occurs. For example, from 2021 to 2024, iron ore prices declined steadily, and the AUD/USD also depreciated. Commodity currencies are relatively friendly to beginners because their price movements are more predictable, and trend trading strategies can more easily capture profit opportunities.

Emerging Market Currencies (CNY, ZAR, etc.)

These currencies come from rapidly developing economies. They often offer high interest rates, attracting investors seeking high yields. However, risks are significant: political instability can cause large exchange rate swings, and lower liquidity can widen bid-ask spreads, leading to potential “interest earned but exchange rate lost.” Although ZAR offers the most attractive interest rates, its volatility and liquidity issues require cautious risk assessment.

Core Considerations for Currency Selection: When choosing currencies for investment, don’t just look at interest rates. More important are three dimensions: fixed deposit rate levels, exchange rate stability, and international liquidity. Mainstream currencies like USD, EUR, and AUD are favored because they perform well across these dimensions. Conversely, safe-haven currencies are stable, commodity currencies follow predictable trends, and these two groups often meet most investors’ needs.

Market Outlook for Major Currency Pairs in 2025

EUR/USD(EUR/USD)

The EUR/USD pair is the most traded in the world, involving the two largest economies. Small fluctuations can trigger chain reactions. Currently, the Fed has entered a rate-cut cycle, while the European Central Bank maintains steady rates and is optimistic about the economy. Under this policy divergence, EUR/USD has risen to a four-year high. Market observers note that US policy uncertainty is rising, whereas the ECB’s independence is stronger, less affected by politics, making EUR/USD a relatively neutral choice for investors.

USD/JPY(USD/JPY)

The yen plays a unique role in forex—it’s the most common funding currency for interest rate arbitrage. Due to uncertainties in US tariffs, the Bank of Japan has paused rate hikes, but most economists expect a return to rate increases within the year. The asynchronous policy directions of the US and Japan reinforce expectations of narrowing US-Japan interest rate differentials. In the short term, both bullish and bearish forces are intense, and USD/JPY may continue to fluctuate within a range, with variables mainly stemming from domestic Japanese politics and BOJ signals.

GBP/USD(GBP/USD)

The British pound has performed strongly this year, mainly driven by a weak US dollar rather than fundamental improvements in the UK economy. The UK’s sluggish growth and market expectations of rate cuts pose risks of re-pricing. The pound is expected to continue oscillating within a certain range, unlikely to see a one-sided rally.

USD/CHF(USD/CHF)

Although Switzerland is not a major global economy, the Swiss franc is widely regarded as a safe-haven currency. When economic uncertainty rises and market turbulence intensifies, Switzerland’s stability, safety, and neutrality make its currency a preferred safe-haven tool. Since 2025, with the US facing trade and fiscal issues, the safe-haven attribute of the dollar has been challenged, and the Swiss franc’s safe-haven value has become prominent, attracting large international capital inflows and pushing its appreciation. In the medium to long term, slowing US economic growth, continued Fed rate cuts, and a weakening dollar index are expected to support the Swiss franc’s strength.

Core Factors Influencing Exchange Rate Fluctuations

To profit from foreign currency investments, understanding what drives exchange rate movements is essential. Exchange rates fundamentally reflect a country’s relative economic health and are influenced by multiple macro factors:

Inflation Rate Differentials: Countries with lower inflation tend to see their currencies appreciate because their prices rise more slowly, maintaining purchasing power. Conversely, high-inflation countries often experience currency depreciation and higher interest rates.

Interest Rate Changes: Higher interest rates attract foreign capital seeking better returns, pushing up the currency’s value. Interest rate decisions are often the most immediate catalysts for short-term exchange rate fluctuations.

Government Debt Levels: Countries with high debt levels are less likely to attract foreign investment and may trigger inflation expectations, leading to currency depreciation.

Trade Conditions: When export prices rise relative to import prices, the country’s international income increases, boosting demand for its currency and causing appreciation.

Political Stability: Stable political environments and consistent policies attract foreign investment, providing a solid foundation for currency value. Conversely, political turmoil can lead to depreciation.

Practical Steps and Key Skills for Beginners

Dual-direction Trading Fundamentals

Unlike traditional one-way investments, the foreign currency market offers two-way trading. The basic strategy is “buy low, sell high”—buy when you expect appreciation, sell when you expect depreciation. Additionally, you can also do “sell high, buy low”—if you expect EUR/USD to depreciate, you can short-sell the pair and buy back later at a lower price for profit.

Investment Decision Framework in Three Layers

First Layer: Target Selection and Trend Judgment

After selecting the currency pair, analyze the policy environment, interest rates, major export trends, etc., to determine the trading direction. For example, if you expect the US to cut rates this year while Japan maintains steady rates, you might go long on JPY against USD. This is the most critical investment decision step, directly affecting success.

Second Layer: Trading Strategy and Risk Control

Set clear entry points, stop-loss, and take-profit levels, considering market risks and transaction costs. For leveraged margin trading, stop-loss placement is especially crucial—too wide risks large losses; too tight may be stopped out prematurely. Beginners are advised to establish long positions near support levels, set stops below recent lows, and exit if the price drops, or hold positions until momentum weakens.

Third Layer: Discipline and Mindset Management

Avoid chasing highs or panic selling. Develop a trading plan beforehand and execute strictly. Enter only when the trend is confirmed—usually requiring a 5-minute or longer timeframe. Once the trend is established, trading with the trend tends to yield higher success rates. Depending on risk appetite, choose 5-minute, 30-minute, or 120-minute charts for reference, but limit daily trades to no more than two to prevent overtrading.

Five Essential Investment Tips for Beginners

1. Focus on Familiar Markets

There are many currencies, but the most liquid and easiest to analyze are major pairs like USD and JPY. Beginners should start with these and avoid unfamiliar or niche currencies.

2. Monitor Market Dynamics in Real-Time

Foreign exchange rates fluctuate constantly, influenced by market sentiment, economic data, and international news. Regularly follow financial news platforms (CNBC, Bloomberg, etc.) to understand current market mood and policy expectations for better decision-making.

3. Diversify and Hedge with Multiple Currencies

Don’t concentrate all funds in a single currency. For example, hold USD fixed deposits while also allocating funds to AUD for hedging. This way, even if one currency declines, gains in another can offset risks.

4. Master the Art of Stop-Loss and Take-Profit

In margin trading, stop-loss is the last line of defense against margin calls. Proper placement is key—too close leads to frequent stop-outs; too far risks large losses. Setting take-profit levels helps lock in gains and prevent profit erosion.

5. Precisely Time Entry Points

A common mistake for beginners is chasing after highs or selling at lows. The correct approach is to wait for a clear trend to form before entering, significantly reducing risk. Once the trend is confirmed, trading in the direction of the trend usually yields more stable profits.

From Theory to Practice

No matter how perfect the theory, it remains just on paper without practical application. The most effective way to learn is through simulated accounts—no real money needed—testing trading strategies and risk management in real market conditions. Beginners should thoroughly test their logic in demo accounts until a consistent profit pattern is established, then start trading with small capital.

Foreign currency investment requires time, experience, and continuous learning. For dedicated investors, it offers a transparent, fair, and opportunity-rich global wealth management platform.