Foreign Currency Investment Complete Guide: Essential Strategies and Risk Management for Beginners

Looking to increase returns through foreign currency investments but unsure where to start? This article will provide an in-depth analysis of key elements in foreign currency investment advice, including investment methods, risk management, currency selection, and practical strategies. In Taiwan’s low-interest environment, mastering correct foreign currency investment advice can help you allocate assets more effectively. Let’s start from the basics and gradually build your knowledge system for foreign currency investing.

Foreign Currency and Forex: Clarifying Concepts

Before discussing foreign currency investments, it’s important to distinguish between two often-confused concepts. “Foreign currency” refers to currencies of other countries besides your own, while “forex” (foreign exchange) refers to assets held in foreign currencies by a country, including bank deposits, government bonds, etc., encompassing a broader scope.

In simple terms, foreign currency is a component of forex; buying and selling foreign currencies is a form of forex trading. In Taiwan, banks typically offer 12 foreign currencies for investors to choose from, including USD, AUD, JPY, EUR, and other major international currencies.

Three Main Ways to Invest in Foreign Currency: Fixed Deposits, Funds, or Margin Trading

For investors with different risk tolerances, foreign currency investments offer three primary options.

Foreign Currency Fixed Deposit — Stable Interest Income

Foreign currency fixed deposits are the most conservative way to invest in foreign currencies, suitable for investors with low liquidity needs. Investors only need to open a foreign currency account at a bank (available to those over 20 years old) to enjoy fixed deposit interest rates. For example, currently, Taiwan’s fixed deposit average annual interest rate is about 1.7%, while in the US, it’s around 5%, creating a spread of about 3%. This interest rate differential is a major attraction for foreign currency fixed deposits.

However, fixed deposits have low liquidity; early withdrawal before maturity will incur interest deductions. They are best suited for long-term holdings. If you want both yield and flexibility, consider other options.

Foreign Currency Funds — Balancing Yield and Flexibility

Foreign currency funds combine the stability of fixed deposits with the flexibility of savings accounts. Investors are not bound by lock-in periods and can buy or sell at any time. The interest rates are usually between savings and fixed deposits. Investors can invest directly in TWD, with fund companies handling currency exchange, earning mainly from interest income and exchange rate differences.

Common foreign currency funds include money market funds and currency ETFs. For example, the UBS (Luxembourg) USD fund has management and custody fees of about 0.5%. Investors can purchase through banks or fund companies. The Yuanta USD Index ETF (00682U), which tracks the USD index, has fees around 0.6% and can be bought via brokerages.

Forex Margin Trading — High Yield, High Risk

Forex margin trading is the top choice for investors seeking high returns. Unlike stock trading, forex operates 24 hours globally, with T+0 mechanisms allowing quick entry and exit. The barrier to entry is very low; a small margin can leverage trading in various currency pairs worldwide.

However, leverage is a double-edged sword that amplifies risks. The Australian ASIC recommends leverage below 30x for major currency pairs, but some platforms offer 50-200x leverage, so investors must be cautious.

The First Lesson in Foreign Currency Investment: Understanding Exchange and Interest Differentials

Profits in foreign currency investing mainly come from two sources: exchange rate differences and interest rate differentials.

Interest differential refers to the difference in benchmark interest rates between countries. For example, Taiwan’s fixed deposit rate is 2%, while the US is 5%, so the 3% gap represents potential profit.

Exchange rate difference arises from currency fluctuations. Investors profit by buying low and selling high.

Many beginners overlook a key risk: “Earning interest differential but losing on exchange rate.” For example, if you exchange TWD 33 for 1 USD and earn 5% interest on USD, but the USD depreciates to TWD 30 per USD, your overall return could turn negative due to exchange rate movement. Therefore, before investing in foreign currencies, clarify whether you aim for interest income (long-term holding) or exchange gains (short-term trading).

Which Currencies Should Beginners Invest In? Friendly Currency Choices

Foreign currencies can be categorized into four types, and investment advice should be tailored to your goals.

Policy-Driven Currencies: USD and EUR

Policy currencies are mainly influenced by central bank monetary policies. USD and EUR, as the currencies of the world’s largest economies, are affected by policy changes that impact global markets. Since 2025, divergence between the Federal Reserve and the European Central Bank’s policies has significantly influenced EUR/USD. Monitoring central bank decisions is crucial when investing in these currencies.

Safe-Haven Currencies: JPY and CHF

JPY and CHF are considered safe-haven assets due to their countries’ political stability and developed economies. During market turbulence, investors tend to buy these currencies to protect assets. CHF, in particular, is favored for short-term safe-haven investments because of its long-term stability.

Commodity-Linked Currencies: AUD and CAD

AUD and CAD are closely tied to commodity prices. Australia, as the world’s largest iron ore exporter, sees its currency highly correlated with iron ore prices. Between 2021-2024, falling iron ore prices led to AUD depreciation. This causal relationship makes technical analysis of commodity currencies more accessible.

Emerging Market Currencies: RMB and ZAR

Emerging market currencies offer high interest rates but come with high risks. ZAR (South African Rand) has attractive rates but significant exchange rate volatility and limited international liquidity. For beginners, it’s advisable to cautiously approach these currencies, gaining experience before considering allocation.

Recommended priority for beginners: USD (policy clarity) → AUD (trend manageable) → JPY (safe-haven). Avoid jumping directly into emerging market currencies to prevent “interest differential gains but exchange rate losses.”

Major Currency Trends and Investment Considerations

EUR/USD

EUR/USD is the most traded currency pair globally, involving two major economies. In 2025, with the Fed cutting rates and the ECB maintaining a steady stance, EUR/USD reached a four-year high. Market analysis suggests Fed policy uncertainty is prompting reevaluation of the dollar’s strength, while the ECB’s policy remains relatively stable.

USD/JPY

JPY plays a key role in carry trades. Divergence between the Bank of Japan and Fed policies, along with narrowing interest rate spreads, influence the pair. Short-term, both bullish and bearish forces are active, and USD/JPY may continue to fluctuate.

GBP/USD

GBP has strengthened mainly due to dollar weakness rather than UK economic fundamentals. As Fed policies become clearer, market sentiment toward GBP may be re-priced. UK economic growth remains sluggish, with rate cut expectations, so GBP’s upward trend is uncertain.

USD/CHF

CHF is a safe-haven currency that gains during US economic uncertainty. Since 2025, USD has been under pressure due to trade and fiscal issues, boosting CHF’s safe-haven appeal. Long-term, US economic slowdown and Fed rate cuts are expected to support CHF.

Key Factors Influencing Exchange Rate Fluctuations

To profit in the foreign exchange market, investors must understand what drives exchange rates.

Inflation Rate: Countries with low inflation tend to see their currencies appreciate. Slow price increases in goods and services reflect currency strength, while high inflation often leads to depreciation.

Interest Rates: Rising interest rates attract foreign capital, pushing up the currency’s value. Central bank rate hikes generally lead to currency appreciation; cuts tend to cause depreciation.

Government Debt: Countries with high government debt are less attractive to foreign investors, leading to capital outflows and currency depreciation.

Trade Conditions: Countries with rising export prices relative to imports tend to see currency appreciation; the opposite leads to depreciation.

Political Stability: Stable political environments attract foreign investment, supporting currency strength; political turmoil can cause depreciation.

Starting with Simulated Trading: A Steady Approach to Foreign Currency Investment

After understanding the basics, practical strategies are equally important.

Step 1: Choose Targets. Analyze the policy, interest rates, and economic fundamentals of the currency pairs you plan to trade. For example, if you expect the US to cut rates while Japan maintains current rates, you might go long JPY/USD.

Step 2: Develop a Trading Strategy. Based on your risk tolerance, experience, and market conditions, set entry and exit points, stop-loss, and take-profit levels. Discipline in executing your strategy is key.

Step 3: Manage Risks. Use stop-loss and take-profit tools to prevent excessive losses. For forex margin trading, avoid high leverage; a common recommendation is not to exceed 2x per trade.

Step 4: Time Your Entry. Wait for a trend to form before entering, avoiding chasing highs or selling lows. Trends typically develop over at least 5 minutes; once established, position accordingly.

Step 5: Mindset Management. Keep emotions in check, avoid impulsive decisions, and continue learning. Using demo accounts to test strategies in real market conditions is highly recommended.

Core Tips for Foreign Currency Investment

Beginners should keep these key points in mind:

• Stick to familiar currencies: Focus on major pairs like USD, JPY, and EUR; avoid chasing small or obscure currencies.
• Stay updated on market news: Exchange rates are influenced by economic data, central bank decisions, etc. Follow sources like CNBC, Bloomberg.
• Diversify to reduce risk: Hold a mix of fixed deposits, funds, or use forex trading to hedge risks.
• Use stop-loss and take-profit tools: Essential for protecting capital in forex trading.
• Wait for the right entry: Don’t chase after highs; establish positions after confirming trends. These simple tips are shared by many successful investors.

Conclusion

The essence of foreign currency investment advice is balancing risk and reward. Whether choosing fixed deposits, funds, or margin trading, understanding each method’s characteristics, risks, and suitable scenarios is crucial. Beginners should start with familiar currencies and conservative approaches, accumulating experience through simulated trading and gradually increasing complexity.

By mastering sound foreign currency investment advice and applying it consistently, you can seize opportunities in the global financial markets and achieve your asset growth goals.