Foreign Currency Investment Beginner's Guide: Strategy Selection, Currency Types, and Risk Management Full Analysis

Foreign currency investment recommendations have always been a key focus for investors in Taiwan. As the global economic landscape shifts, more people are considering foreign currency investments to achieve asset appreciation and risk diversification. If you’re contemplating how to participate in the forex market, this article will provide a detailed analysis of the core elements of foreign currency investing.

Starting with Basic Knowledge: The Difference Between Foreign Currencies and Foreign Exchange

Many novice investors tend to confuse “foreign currency” and “foreign exchange.” In fact, they are conceptually distinct.

Foreign currency refers to all foreign monetary forms other than the domestic currency, including banknotes, coins, and physical currency. Foreign exchange (forex) is a broader concept that encompasses all assets denominated in foreign currencies, including bank deposits, government bonds, corporate bonds, stocks, and various payment instruments. In short, foreign currency is a subset of foreign exchange.

In the forex market, transactions include direct buying and selling of foreign currencies, trading foreign currency payment instruments, and trading foreign currency securities, among other forms. The core of foreign currency investment advice lies in how to choose the most suitable participation method among these options.

The Essence of Foreign Currency Investment: Interest Rate Differentials and Exchange Rate Differentials

To earn returns from foreign currency investments, it is essential to understand two key concepts: interest rate differentials and exchange rate differentials.

Interest rate differential refers to the difference in benchmark interest rates between countries. For example, if Taiwan’s fixed deposit rate is 2% and the US is 5%, the 3% difference represents a potential profit source. Investors can convert funds into high-yield currencies and place fixed deposits to realize interest rate gains.

Exchange rate differential arises from fluctuations in currency exchange rates. When you buy US dollars at 33 TWD per USD and later sell when the USD appreciates to 35 TWD per USD, you profit from the exchange rate movement.

However, the most important warning in foreign currency investment advice is: earning interest rate differentials may result in losses from exchange rate movements. Even if the USD interest income is 5%, if the USD depreciates by 8%, the overall investment will still incur a loss. Therefore, investors need to pay attention to both interest income and exchange rate risks to formulate a comprehensive investment strategy.

Comparing the Three Main Foreign Currency Investment Methods

Taiwanese investors mainly participate in foreign currency investments through three channels, each with different risk-return profiles.

Foreign Currency Fixed Deposit: Conservative Choice

Foreign currency fixed deposits are the simplest and lowest-risk method. Investors only need to open a foreign currency account at a bank to proceed with fixed deposits. The advantages are straightforward processes, controllable risks, and primarily earning interest rate differentials.

The downside is limited liquidity. If the exchange rate has reached an ideal level but the fixed deposit term has not expired, early withdrawal may incur interest deductions. Additionally, the low interest rates on savings accounts make capital efficiency less optimal.

Foreign Currency Funds: Flexible Choice

Foreign currency funds offer an option between fixed deposits and margin trading. They do not require lock-in periods and can be bought or sold at any time. Returns are between savings account and fixed deposit interest rates. Investors can invest directly in TWD, with the fund company handling currency exchange, earning from interest income and exchange rate movements.

Common foreign currency funds include money market funds and currency ETFs. These funds are suitable for investors who need flexible capital allocation but do not want to bear excessive risk.

Forex Margin Trading: Advanced Choice

Forex margin trading involves leveraging to amplify trading volume, purely pursuing exchange rate gains. This method offers several advantages: 24-hour global trading, T+0 settlement, low entry barriers, and a wide range of trading instruments.

However, leverage also means high risk. Traders must precisely time entries and exits, set reasonable stop-loss points, and avoid over-leverage that could lead to margin calls. Regulatory bodies typically recommend that leverage on major currency pairs not exceed 30 times.

Why Invest in Foreign Currencies

In the current environment, the necessity of foreign currency investment is increasingly evident.

First, relatively low entry barriers. Opening a foreign currency account via bank apps or in-branch is quick and straightforward, with no complicated procedures.

Second, an essential asset allocation choice. If all assets are denominated in TWD, a depreciation of the TWD will shrink wealth. Holding multiple currencies can effectively hedge against exchange rate risks. For example, during the Russia-Ukraine conflict, the Ukrainian currency depreciated sharply in the short term, but investors with diversified currency holdings could avoid most losses.

Third, higher market transparency. The forex market has a daily trading volume of trillions of dollars, with participants worldwide, making manipulation difficult. In contrast, stock markets are relatively less transparent.

Finally, unmatched trading flexibility. The forex market operates 24 hours, allowing investors to close positions immediately if price movements turn unfavorable. Stock markets are limited to fixed trading hours.

Types of Currencies and Investment Characteristics

The major currencies in the global forex market can be categorized into four groups based on their characteristics, each with different investment logic.

Policy-Driven Currencies: USD, EUR

These currencies’ exchange rates are mainly influenced by central bank monetary policies. Loose policies tend to lead to depreciation, while tightening policies push rates higher. Investing in these currencies involves tracking central bank policy directions, especially interest rate decisions.

The policy divergence between the Federal Reserve and the European Central Bank has become a market focus. After the Fed begins a rate cut cycle in 2024, it is expected to keep rates steady into early to mid-2025, while the ECB maintains a relatively stable stance. This divergence directly impacts EUR/USD movements.

Safe-Haven Currencies: JPY, CHF

Japan and Switzerland are viewed as safe-haven destinations due to their economic stability and political neutrality. Their central banks rarely adjust interest rates, and domestic political situations are stable. During global economic turbulence, large capital inflows tend to favor these currencies.

Investors can profit through arbitrage by borrowing in low-interest currencies (usually JPY) and investing in higher-yield assets. When economic recovery or risk appetite increases, they can close positions to realize interest rate differentials.

Commodity Currencies: AUD, CAD

These currencies are highly correlated with commodity prices. Australia is a major iron ore exporter, and Canada is an oil and gas exporter. When commodity prices rise, export revenues increase, boosting demand for these currencies and pushing up their exchange rates. Conversely, the opposite occurs when prices fall.

Commodity currencies tend to have more predictable price fluctuations, making them suitable for technical analysis and trend trading. Beginners often find it easier to predict currency movements by studying commodity price trends.

Emerging Market Currencies

These currencies come from developing countries, often with higher interest rates to attract arbitrage traders. However, they are also characterized by volatile exchange rates, political instability, low liquidity, and large bid-ask spreads. While interest rate differentials are attractive, the associated exchange rate risks are significant and require careful assessment.

Current Trends in Major Currency Pairs

EUR/USD(

As the most traded currency pair globally, EUR/USD’s volatility influences the entire forex market. Since 2025, driven by the Fed’s rate cuts and improving economic data in the Eurozone, EUR/USD has reached a four-year high.

Market consensus suggests that increased policy uncertainty in the US has elevated dollar risk premiums, while the relatively independent monetary stance of the ECB provides market stability expectations.

) USD/JPY###

The JPY is a focus in forex due to carry trade activities. The Bank of Japan has paused interest rate hikes amid concerns over US tariff policies, but market expectations of possible rate hikes within the year remain.

The divergence between the BOJ and Fed policies has increased expectations of narrowing US-Japan interest rate differentials. Coupled with domestic political factors, USD/JPY exhibits oscillations with intense battles between bulls and bears.

( GBP/USD)

The GBP has strengthened against the USD this year mainly due to dollar weakness rather than improvements in the UK economy. As the Fed’s policy outlook clarifies, the GBP may face re-pricing. Given the UK’s sluggish economic growth and rate cut expectations, the GBP is expected to remain within a range.

USD/CHF(

The Swiss franc, a traditional safe-haven currency, has recently appreciated significantly due to weakening dollar safe-haven attributes. With US economic growth slowing, the Fed continuing rate cuts, and the dollar index generally weak, the safe-haven appeal of the CHF has further increased.

Key Factors Influencing Exchange Rate Fluctuations

The core of foreign currency investment is to grasp exchange rate movements, so understanding the main factors affecting exchange rates is crucial.

Inflation directly impacts a currency’s purchasing power. Low inflation countries tend to see currency appreciation, while high inflation countries often face depreciation.

Interest rates determine international capital flows. Higher interest rates attract foreign investment, increasing currency demand and pushing up the exchange rate.

Government debt affects investor confidence in a country’s repayment ability. Countries with high debt levels often see their currencies weaken.

Trade conditions reflect the relative price changes of exports versus imports. Improved trade terms mean increased income and higher demand for the domestic currency.

Political stability is an important risk assessment indicator. Countries with low political risk attract more foreign investment, supporting currency appreciation.

Practical Forex Investment Tips: Trading Strategies

) Selecting Targets and Market Analysis

The first step in foreign currency investment is choosing trading targets. Investors should thoroughly understand the central bank policies, interest rate environments, and major export industries of the countries corresponding to the currencies they trade. For example, if you expect the Fed to continue cutting rates and the Bank of Japan to hold steady, you might consider going long JPY/USD. The success of this decision hinges on accurately predicting US interest rate decisions.

Developing Trading Strategies

The most critical aspect of forex investment advice is establishing a clear trading plan. The strategy should include entry and exit points, stop-loss and take-profit levels, and specific parameters. It is also necessary to evaluate market risks and trading costs.

For beginners, the most practical approach is to wait for a trend to form before entering. Usually, it takes 5 minutes or longer to confirm a trend. Once confirmed, investors can establish corresponding positions. Based on personal risk tolerance, they can choose different timeframes such as 30-minute or 120-minute charts for reference.

( Risk Management Is Crucial

Stop-loss and take-profit orders are the lifelines of forex trading. Especially in leveraged margin trading, setting reasonable stop-loss points can prevent margin calls. It is recommended to limit daily trading to no more than twice to avoid frequent entries and exits that increase costs.

In day trading, traders can establish long positions near previous lows with stop-loss orders below those lows. If the price falls below the lows, positions are automatically closed; if the price continues to rise, the position is maintained until momentum weakens, then closed.

) Timing Entry Points

Avoid chasing highs and selling lows. The best approach is to predefine a trading plan and execute it strictly. Patience is key if the timing is not yet right. A simple method is to observe whether a trend has formed rather than trying to predict price movements.

Mindset and Learning

Investors should maintain a calm and rational mindset, avoiding impulsive decisions due to market volatility. Forex investing is a continuous learning process; practicing with demo accounts allows testing strategies without risking capital.

Core Tips for Foreign Currency Investment

Prioritize familiar currencies. Beginners should focus on major currencies like USD and JPY, which have high trading volumes, abundant information, and strong liquidity.

Continuously monitor market dynamics. Forex rates are influenced by multiple factors; investors should regularly follow international news, central bank policies, and economic data.

Implement diversification. For example, holding both USD fixed deposits and AUD funds can hedge risks. Once a suitable combination is found, avoid frequent adjustments.

Strictly adhere to discipline. Regardless of the investment method, follow the pre-set trading plan and do not change strategies due to market fluctuations.

Assess risk tolerance. Foreign currency investment recommendations should primarily be based on individual risk preferences. If risk capacity is limited, choose fixed deposits or funds; if experienced and with sufficient capital, consider margin trading appropriately.

Foreign currency investment is not a shortcut to quick wealth but an important part of long-term asset allocation. Through scientific analysis, rational strategies, and disciplined execution, investors can achieve stable returns in the forex market.