Foreign Currency Investment Beginner's Advanced Guide: Mastering the Key to Profiting from Exchange Rate and Interest Rate Differentials

Many people know that investing in foreign currencies can be profitable, but they are unclear on how to operate specifically. In fact, foreign currency is similar to other financial products, with profits coming from “exchange rate differences” (rate fluctuations) and “interest rate spreads” (differences between countries’ interest rates). The key to successful currency investment lies in understanding the market, assessing risks, and developing appropriate investment strategies.

Taiwan’s legal currency is the New Taiwan Dollar, and all other currencies are collectively called foreign currencies. The US dollar has always been the most watched choice by Taiwanese investors, but AUD, JPY, and others are also popular. In the current low-interest environment, Taiwan bank fixed deposits yield about 1.7% annually, prompting many to seek higher returns through foreign currency investments.

Understanding the Core Concepts of Currency Investment

Difference Between Currency Investment and Forex Trading

“Foreign currency” and “forex” are two concepts that are often confused. Foreign currency refers to currencies other than the domestic currency, and is a form of forex. Forex has a broader scope, including bank deposits, government bonds, and various foreign currency assets. Simply put, buying and selling foreign currencies is a type of forex trading.

The main risk in currency investment comes from exchange rate fluctuations. Many beginners believe that holding a diversified portfolio of different currencies can manage risks, but the real key to risk management is understanding why exchange rates move and formulating investment strategies accordingly.

Profit Logic in Currency Investment: Exchange Rate and Interest Rate Spreads

Profits from currency investment mainly come from two parts. The first is the “interest rate spread” — for example, if Taiwan’s fixed deposit rate is 2% and the US’s is 5%, the 3% difference is potential profit. The second is the “exchange rate difference” — profit made from buying and selling currencies at different rates.

However, these two sources of income are not guaranteed to be profitable. Suppose you exchange 33 TWD for 1 USD, earning 5% interest on USD, but if ultimately the USD can only be exchanged back for 30 TWD, you will still incur a loss overall. This is the risk of “earning interest rate spread but losing on exchange rate.” Therefore, before investing in foreign currencies, clarify your goal—are you aiming for interest spread gains over the holding period or short-term exchange rate trading opportunities?

Three Main Profit Paths in Currency Investment

Taiwanese investors can choose from three main ways to invest in foreign currencies, each with different characteristics:

1. Foreign Currency Fixed Deposit — Stable Interest Spread Income

This is the most suitable method for beginners. Investors simply open a foreign currency account at a bank (available to those over 20), and deposit funds to earn interest. The downside is low liquidity—if the exchange rate reaches your target but the fixed deposit term isn’t over, early withdrawal will deduct interest. To balance liquidity and returns, many combine this with foreign currency funds.

2. Foreign Currency Funds — Flexible Allocation and Balanced Returns

Foreign currency funds do not require lock-in periods and can be bought or sold at any time. The interest rate is between that of savings accounts and fixed deposits, making it ideal for investors needing liquidity. Investors don’t need to exchange currencies themselves; they invest in TWD, and the fund company manages operations. Common choices include money market funds (e.g., UBS USD fund, management fee ~0.5%) and currency ETFs (e.g., Yuanta USD Index ETF, management fee ~0.6%).

3. Forex Margin Trading — High Leverage for Exchange Rate Gains

This method is for more experienced investors. Forex margin trading does not earn interest but aims purely at exchange rate differences. Due to low volatility in currencies, leverage is often 50-200 times. Advantages include 24-hour trading, T+0 mechanism, and low entry barriers, but risks are high. Australian regulators recommend leverage below 30x for major currency pairs to avoid excessive risk.

Currency Classification and Investment Logic

Taiwan banks typically offer 12 currency options: USD, EUR, JPY, AUD, CAD, GBP, CHF, HKD, NZD, SGD, ZAR, SEK. These can be grouped into four categories:

Policy Currencies (USD, EUR) — Exchange rates mainly influenced by central bank policies. When central banks adopt easing policies, rates tend to fall; tightening policies lead to appreciation. Investing in these currencies requires paying attention to central bank policy announcements.

Safe-Haven Currencies (JPY, CHF) — Countries with stable politics and developed economies, with conservative central bank policies. During turbulent times, investors buy these currencies for safety, sometimes borrowing in these currencies for carry trades.

Commodity Currencies (AUD, CAD) — Countries that export major commodities. When commodity prices rise, demand for these currencies increases, causing appreciation; when prices fall, the opposite occurs. For example, Australia is the world’s largest iron ore exporter; from 2021 to 2024, iron ore prices declined, weakening the AUD. For beginners, the trends of commodity currencies are relatively easier to grasp.

Emerging Market Currencies (CNY, ZAR) — Countries with higher interest rates but unstable politics, large exchange rate fluctuations, low international liquidity, and higher investment risks.

Investment Advice: Beginners should prioritize safe-haven and commodity currencies, combining them to reduce risks and better grasp trends. Mainstream currencies like USD, EUR, and AUD are favored for their liquidity and relatively stable exchange rates.

Major Currency Pair Trends and Investment Opportunities

EUR/USD

Europe and the US are the world’s largest economies; EUR/USD is the most traded currency pair. The Federal Reserve began a rate-cutting cycle in late 2024, while the European Central Bank remains relatively stable, strengthening the euro against the dollar. Market consensus suggests increased policy uncertainty for the Fed, and the ECB’s higher policy independence makes the euro a relatively safer choice.

USD/JPY

The yen is often used for carry trades, where investors borrow yen to buy high-interest currencies. The Bank of Japan has paused rate hikes to assess US policy impacts, but most analysts expect a 25 basis point hike before year-end. Diverging monetary policies between the US and Japan reinforce expectations of narrowing interest rate spreads, likely causing USD/JPY to fluctuate.

GBP/USD

The pound has strengthened mainly due to dollar weakness, not because of improved UK fundamentals. With sluggish economic growth and rate cut expectations, the pound is unlikely to rise sharply and may remain in a range.

USD/CHF

The Swiss franc is a popular safe-haven currency. As the dollar’s safe-haven appeal is challenged, the CHF’s status as a safe asset becomes more prominent, attracting international capital inflows and pushing it higher. In the medium to long term, US economic slowdown, Fed rate cuts, and dollar weakening will continue to support the Swiss franc.

Five Major Factors Affecting Exchange Rates

Understanding what influences exchange rate movements is crucial for currency investment. The main factors include:

Inflation Rate — Countries with low inflation tend to see their currencies appreciate, as rising prices slow the increase in purchasing power.

Interest Rates — Higher interest rates attract foreign capital, boosting the currency.

Government Debt — Countries with high debt levels struggle to attract foreign investment, leading to currency depreciation.

Trade Terms — When export prices rise faster than imports, trade balance improves, increasing currency demand and appreciation.

Political Stability — Stable political environments attract foreign investment, causing currency appreciation; instability leads to depreciation.

Practical Methods for Beginners to Invest in Foreign Currencies

After understanding the basics, how can you practically operate in currency investment?

The core logic is “buy low, sell high,” but the forex market supports two-way trading. You can go long (buy) on currencies you expect to appreciate or go short (sell) on those you expect to depreciate. For example, if you expect EUR to weaken against USD, you can sell EUR/USD and profit when EUR drops.

Steps for successful currency investment:

Step 1: Choose the target — analyze policy and fundamentals

Research the central bank policies, interest rates, economic data, and major exports of the two currencies involved. This is the most critical decision point. For example, if you believe the US will cut rates this year while Japan keeps rates steady, you might go long JPY against USD. The content of US Federal Reserve meetings becomes very important here.

Step 2: Develop a trading strategy — match your risk appetite

Create a strategy based on your experience, risk tolerance, and market conditions. Include entry and exit points, stop-loss, and take-profit levels, considering market risks and transaction costs.

Step 3: Wait for the right timing — follow the trend

Avoid chasing highs or selling lows; plan your trades in advance. The simplest approach is to wait for a trend to form. Usually, a trend takes at least 5 minutes or longer to establish. Once confirmed, you can consider opening a position. Different traders may use different timeframes for reference.

Step 4: Maintain a stable mindset — avoid emotional trading

Market volatility is inevitable. Investors should stay calm and not change strategies based on short-term fluctuations. Continuous learning and practice are the only ways to accumulate experience.

Step 5: Choose a suitable platform — ensure safety and low costs

Trading platforms should be secure, reliable, low-cost, feature-rich, and offer diverse instruments. When evaluating, consider risks and convenience.

Seven Essential Tips for Currency Investment

1. Only invest in currencies you understand — With many currencies available, beginners should focus on major pairs like USD and JPY, which have high trading volume, abundant information, and manageable volatility.

2. Keep an eye on exchange rate movements — Exchange rates are affected by market, economic, and news factors. Regularly follow international financial media like CNBC, Bloomberg to stay updated.

3. Diversify your portfolio — Hold a mix of assets, such as USD fixed deposits and AUD funds, to hedge risks. Once properly allocated, avoid frequent trading.

4. Learn to set stop-loss and take-profit — Especially in margin trading, setting appropriate stop-loss levels is crucial to prevent margin calls. Limit daily trades to about two.

5. Pay attention to entry timing — Plan your trades in advance and execute when conditions are right. The simplest method is to wait for a trend to form before entering.

6. Regularly review risk-reward ratios — Periodically assess your holdings, evaluate the expected interest and exchange rate trends, and adjust strategies based on market conditions.

7. Use demo trading extensively — Before risking real money, test your strategies in simulated accounts under real market conditions to evaluate risk control and operational skills.

There are no shortcuts in currency investment. Success depends on combining theory with practice. Start with low-risk fixed deposits to build experience, then gradually move to funds and margin trading. Only by truly understanding the market, respecting risks, and practicing patience can you achieve steady progress in currency investment.