Foreign Currency Investment Beginner's Guide: Comparison of Three Methods, Currency Selection, and Risk Management Complete Guide

Would you consider using foreign currency investments to counteract a low interest rate environment? Taiwan’s fixed deposit rates have remained around 1.7% for a long time, while currencies like the US dollar and Australian dollar offer much higher interest rates. This is why more and more people are paying attention to foreign currency investments. This article will guide you from zero, helping you understand how to choose suitable foreign currency investment methods, grasp the patterns of exchange rate fluctuations, and develop practical investment strategies.

Three Key Concepts of Foreign Currency Investment

Before diving into foreign currency investments, you need to clarify three basic concepts.

First, “foreign currency” and “foreign exchange” are not the same. Foreign currency refers to all foreign currencies other than your home country’s currency. Foreign exchange (forex) refers to assets held in foreign currencies outside your country and various payment methods used for international settlement, including bank deposits, government bonds, etc. Simply put, buying and selling foreign currencies is a form of forex trading.

Second, there are only two sources of profit in foreign currency investment: interest rate differentials and exchange rate differences. The interest rate differential is the difference between the benchmark interest rates of different countries—for example, Taiwan’s 2% fixed deposit versus the US’s 5%, with a 3% potential profit margin. Exchange rate differences come from currency fluctuations; buying low and selling high can earn you the spread. However, these two profit methods often conflict: you might earn interest but suffer losses due to currency depreciation, which is the trap of “earning interest rate differentials but losing on exchange rate differences.”

Third, your choice of investment method determines your risk-to-reward ratio. Foreign currency fixed deposits have low leverage, low risk, and low returns; foreign currency funds are in between; forex margin trading offers 50-200 times leverage, with substantial returns but extremely high risk. Beginners should gradually upgrade based on their risk tolerance.

Three Mainstream Methods of Foreign Currency Investment

Method 1: Foreign Currency Fixed Deposit — The Most Stable Choice

Foreign currency fixed deposits are the simplest and safest way to invest in foreign currencies. You just need to open a foreign currency account at a bank (if you are over 20 years old with ID, you can do this), exchange New Taiwan Dollars (NTD) into USD, JPY, AUD, etc., and deposit for periodic interest income.

The advantage of this method is low risk and simple operation, suitable for beginners. But it also has obvious disadvantages: poor liquidity—if the exchange rate reaches your target but the fixed deposit term isn’t over, early withdrawal will incur interest deductions; the savings account interest rate is too low, making investors face a dilemma.

Method 2: Foreign Currency Funds — Balancing Flexibility and Returns

Foreign currency funds complement the shortcomings of fixed deposits. They don’t require long-term commitments, can be bought and sold anytime, and offer interest rates between savings and fixed deposits. Investors can purchase directly with NTD, as fund companies handle currency exchange, with main income from interest and exchange rate differences.

Common foreign currency funds include money market funds and currency ETFs. For example, USD money market funds usually have management fees around 0.5%; USD index ETFs track the USD index with management fees about 0.6%. These funds can be purchased at banks, brokerages, or fund companies, suitable for investors needing liquidity while earning from exchange rate differences.

Method 3: Forex Margin Trading — High Returns with High Risks

If you have investment experience and are unsatisfied with interest income, forex margin trading might be an option. This method forgoes interest and profits purely from exchange rate differences. Due to low volatility in forex, trading platforms typically offer 50-200 times leverage.

Forex margin trading operates 24 hours, with T+0 mechanisms, low entry barriers—requiring only a small margin to trade various currency pairs globally. But leverage is a double-edged sword—while it amplifies gains, it also multiplies risks. Australian regulators recommend that leverage for major currency pairs not exceed 30 times. Beginners should be especially cautious.

The 12 Most Common Foreign Currencies for Taiwanese Investors

Taiwan banks usually offer 12 foreign currency investment options: USD(, AUD), CAD(, HKD), GBP(, CHF), JPY(, EUR), NZD(, SGD), ZAR(, SEK).

These currencies can be categorized into four groups based on exchange rate influences:

Policy Currencies (USD, EUR): Exchange rates mainly affected by central bank monetary policies. Loose policies lead to depreciation; tightening policies lead to appreciation. Investors should closely monitor central bank meetings.

Safe-Haven Currencies (JPY, CHF): These countries are politically stable and economically developed, with almost unchanged interest rates. During turbulent times, investors buy these currencies for hedging. Many even borrow in these low-interest currencies for carry trades, then convert back when the economy improves.

Commodity Currencies (AUD, CAD): These countries mainly export commodities. When commodity prices rise, other countries need to exchange more local currency to buy them, causing the currency to appreciate. For example, Australia, as the world’s largest iron ore exporter, sees its dollar weaken when iron ore prices fall. For beginners, the price fluctuation patterns of commodity currencies are easier to grasp.

Emerging Market Currencies (CNY, ZAR): These countries are in rapid development, with high interest rates attracting investors seeking yield spreads. But political instability causes large exchange rate swings, and bid-ask spreads are wider, making risks higher.

Which Foreign Currencies Are Worth Watching in the Current Market Environment?

Entering 2025, global monetary policies are shifting, directly affecting foreign currency investment opportunities.

The US dollar faces policy uncertainty

The Federal Reserve began a rate-cut cycle in September 2024, lowering rates by 100 basis points in total. However, the five rate decisions in 2025 have kept rates unchanged. The latest news indicates a 25 basis point cut to 4.00%-4.25% in September 2025. This cut mainly responds to a soft US labor market. Many market analysts believe that Trump’s policies have raised doubts about the Fed’s independence, increasing policy uncertainty for the dollar. In contrast, the European Central Bank (ECB) maintains higher policy independence and a more steady stance. With the Fed cutting rates and the ECB holding steady, the euro has risen to a four-year high against the dollar.

The Yen faces policy divergence

The Bank of Japan paused interest rate hikes in January 2025, but most economists expect a 25 basis point increase before year’s end. The policy divergence between the US and Japan strengthens expectations of a narrowing US-Japan interest rate gap. The yen, often used in carry trades, will be directly affected by this change. In the short term, the yen may continue to fluctuate.

The GBP/USD is strengthening but with risks

The pound has appreciated this year mainly due to a weakening dollar rather than fundamental improvements in the UK economy. As Fed policies become clearer, the market faces re-pricing risks for the pound. Considering the UK’s sluggish growth and expectations of rate cuts, the pound is likely to remain range-bound, making a one-sided rally unlikely.

The Swiss Franc’s safe-haven value is highlighted

Since 2025, the US has faced trade and fiscal difficulties, challenging the dollar’s safe-haven status. The Swiss franc, a traditional safe haven, has attracted large capital inflows and appreciated significantly. In the medium to long term, slowing US economic growth, Fed rate cuts, and a weakening dollar index will support the Swiss franc.

Five Major Factors Influencing Exchange Rate Fluctuations

To profit from foreign currency investments, you must understand why exchange rates move.

Inflation: Countries with low inflation see their currencies appreciate. Persistent low inflation indicates slow price increases for goods and services, strengthening currency purchasing power, leading to appreciation. Conversely, high inflation countries tend to see their currencies depreciate.

Interest Rates: Rising interest rates attract foreign capital, increasing demand for the currency and causing appreciation. This explains why the dollar tends to strengthen when the Fed raises rates.

Government Debt: High-debt countries struggle to attract foreign investment, leading to increased inflation and currency depreciation. Foreign investors sell bonds, further depressing the currency.

Trade Terms: When export prices rise relative to import prices, the country’s international competitiveness improves, increasing demand for its currency and causing appreciation.

Political Stability: Countries with stable political environments attract more foreign investment, boosting their currency value. Political turmoil often leads to depreciation.

Practical Guide to Foreign Currency Investment

Knowing how to buy and sell foreign currencies is just the starting point. To truly profit, you need to master the following.

Choose Your Trading Targets

Deeply understand the policies, interest rates, and major export changes of the two currencies you plan to go long or short on. This is the most critical part of your investment decision. For example, if you expect the US to cut rates this year and Japan’s rates remain unchanged, you might go long on JPY/USD. Your decision hinges on the US rate cut, so the Fed’s meetings are crucial.

Develop Reasonable Trading Strategies

Based on your risk tolerance, trading experience, and market conditions, formulate a suitable strategy. This should include entry and exit points, stop-loss and take-profit levels, and consideration of market risks and transaction costs. In forex margin trading, setting proper stop-losses is vital to prevent margin calls. For example, in day trading, you might open a long position near a recent low and set a stop-loss below that low. If the price drops below, you exit automatically; if it rises, you hold the position until momentum wanes. Limit yourself to a maximum of two trades per day.

Constantly Monitor Exchange Rate Fluctuations

Exchange rates are affected by market, economic, and news factors, causing frequent swings. Investors must stay updated on international developments by following news platforms like CNBC, Bloomberg, Yahoo Finance, and Investing.

Learn to Diversify

Don’t put all your funds into one currency. For example, if you hold USD fixed deposits, you can also allocate some funds to AUD funds to hedge risks. Once you have a suitable allocation, there’s no need to buy and sell daily.

Seize Entry Opportunities

Avoid chasing highs or selling lows. Prepare a trading plan in advance and execute accordingly. The simplest way is to wait for a trend to form. Establishing a trend usually takes 5 minutes or longer. Once a trend is confirmed, consider building positions to participate. Traders with different habits can also choose other timeframes like 30 minutes or 120 minutes as references.

Recommendations and Risks in Foreign Currency Investment

Avoid unfamiliar currencies: There are many currencies in the market with constant news. But the most traded are still major pairs like USD and JPY. Beginners should only invest in currencies they understand.

Beware of the trap “earning interest rate differential but losing on exchange rate”: For example, if 1 USD = 33 TWD, and you earn 5% interest in USD but can only convert back at 30 TWD, you still suffer overall loss. So, consider both interest rates and exchange rate risks simultaneously.

Learn to set stop-loss and take-profit orders: Forex is especially suitable for short-term trading. Properly setting stop-loss orders is crucial to prevent margin calls. Also, set take-profit points to realize gains.

Choose appropriate investment methods: Beginners should start with low-risk options like fixed deposits or funds. After gaining experience, consider leveraged trading.

Pay attention to central bank policies: Foreign currency investments are closely related to macroeconomic policies. Regularly follow major central banks’ (Fed, ECB, BOJ, etc.) policy meetings and news.

In summary, foreign currency investment begins with understanding the market and choosing methods aligned with your risk tolerance. Start with demo trading to accumulate experience, then, once familiar with exchange rate movements and market factors, proceed with real funds. Continuous learning, disciplined trading, and maintaining a stable mindset are key to success in foreign currency investments.