Foreign Currency Investment Guide: Master the Forex Market Opportunities from Scratch

Want to profit in the currency market but don’t know where to start? Many people feel both excited and confused about foreign currency investments. In fact, as long as you understand a few core concepts and choose the investment channels suitable for you, beginners can definitely find opportunities in foreign currency investing. This comprehensive guide will take you deep into the various methods, risk characteristics, and practical advice for foreign currency investments.

Foreign Currency VS Forex: Understanding These Two Concepts Is Important

When it comes to foreign currency investment, many people confuse “foreign currency” and “forex.” In reality, there is a clear distinction between the two.

Foreign currency specifically refers to all types of foreign currencies other than the domestic currency, including physical forms like banknotes and coins. Forex (foreign exchange) covers a broader scope, not only including national currencies but also assets in foreign currency form, such as bank deposits, government bonds, corporate bonds, and other financial instruments. Simply put, foreign currency is a subset of forex.

In the forex market, investment activities include four levels:

• Direct buying and selling of foreign banknotes and coins
• Trading foreign currency payment tools (drafts, deposit certificates, etc.)
• Trading foreign currency securities (government bonds, corporate bonds, stocks)
• Trading other foreign currency assets

Therefore, it can be said: Foreign currency trading is the basic form of forex trading, while forex encompasses more financial activities.

The Essence of Making Money with Foreign Currency: Interest Rate Differentials and Exchange Rate Margins

Many beginners know that buying and selling foreign currencies can be profitable, but the specific profit mechanisms are not very clear. The returns from foreign currency investments mainly come from two channels: exchange rate spread gains and interest income.

What are exchange rate spread and interest rate differential?

Exchange rate spread refers to the profit generated from fluctuations in exchange rates. For example, buying NT$33 to 1 USD, and when the USD appreciates to NT$35, selling it will yield a NT$2 exchange rate profit.

Interest rate differential arises from differences in benchmark interest rates across countries. Currently, Taiwan’s fixed deposit rate is about 2%, while the US can reach 5%. This 3 percentage point gap presents an interest rate arbitrage opportunity. Holding US dollar fixed deposits allows you to continuously earn 5% interest.

The Risks of Interest Rate Differential Gains

However, many investors make a classic mistake: they earn the interest differential but lose on the exchange rate.

Suppose you exchange NT$33 for 1 USD, earning 5% interest on USD over the year, which is $0.05. During this period, the USD depreciates to NT$30 per USD, meaning you need NT$30 to buy 1 USD. In the end:

• Interest income: +$0.05 = +NT$1.5
• Exchange rate loss: (NT$33 - NT$30) × 1 USD = -NT$3
• Actual loss: NT$1.5

This clearly shows that before investing in foreign currencies, you must clarify your goal: are you pursuing regular interest income, or capturing exchange rate fluctuations through short-term trading? At the same time, you must fully assess exchange rate risks and develop corresponding strategies.

Comparison of the Three Main Foreign Currency Investment Channels

Taiwanese investors typically have three mainstream ways to invest in foreign currencies, each with advantages and disadvantages:

( Foreign Currency Fixed Deposit: Stable but Less Flexible

Foreign currency fixed deposits are the simplest way to invest in foreign currencies. Investors need to open a foreign currency account at a bank (anyone over 20 can do this), deposit funds, and receive interest periodically.

The advantage is very low risk, suitable for conservative investors. The downside is limited liquidity; if you need to withdraw before maturity, early termination will deduct interest, often putting investors in a dilemma.

) Foreign Currency Funds: Balance of Flexibility and Returns

Foreign currency funds solve the problem of low flexibility in fixed deposits. Investors can buy and sell anytime without binding periods, and the interest earned is between that of savings and fixed deposits.

Common foreign currency funds include money market funds and currency ETFs. Investors can purchase directly with TWD, and fund companies handle currency exchange. Management and custody fees are usually around 0.5%-0.6%. Returns come from both interest income and exchange rate differences, making it suitable for intermediate investors needing liquidity.

Forex Margin Trading: High Returns, High Risks

If investors have trading experience, they can consider forex margin trading. This method does not pursue interest income but aims purely at profit from exchange rate differences.

Core features of forex margin trading:

• High leverage: Usually between 50-200x, allowing small capital to control large trades
• 24-hour trading: No restrictions by stock market hours, trade anytime
• Two-way trading: Long and short positions, increasing profit opportunities
• Low entry barrier: Small margin required to start trading

However, leverage amplifies both gains and risks. For example, using 100x leverage, a 1% price movement can lead to 100% loss of capital. Risk control is crucial. The Australian regulator ASIC recommends leverage below 30x for major currency pairs.

Why Invest in Foreign Currencies? Core Advantages

1. Low barrier, easy operation

Foreign currency accounts can be quickly opened at banks via counter or mobile app, with no complicated procedures. After opening, you can start buying and selling, making it one of the easiest investment products for ordinary investors.

2. Hedging Asset Allocation

If all assets are denominated in a single currency, a depreciation of that currency will shrink overall assets. Holding multiple foreign currencies can diversify currency risk, which is a fundamental principle of modern asset allocation. Past events like the Ukraine hryvnia crisis and Russian ruble plunge have demonstrated this.

3. Fair and Transparent Market

The forex market is the largest financial market globally, with a daily trading volume exceeding $3 trillion USD, involving investors worldwide. Such a large market makes price manipulation extremely difficult, offering more fairness compared to stock markets.

4. 24-Hour Trading Mechanism

The forex market is open year-round, allowing investors to enter and exit at any time. If the price trend is unfavorable, positions can be closed immediately to cut losses, unlike stocks limited by fixed trading hours.

Analysis of the Most Popular Currencies for Taiwanese Investors

For a long time, Taiwan’s interest rates have been at a low level globally, while major overseas currencies tend to have higher interest rates. This interest rate differential attracts many Taiwanese investors to allocate funds in foreign currencies. Taiwanese banks usually offer 12 currency options for investment.

Based on the main factors driving exchange rates of these 12 currencies, they can be divided into four categories:

Policy Currencies: USD and EUR

These currencies’ exchange rates are mainly influenced by central bank monetary policies. Loose policies (rate cuts, quantitative easing) tend to weaken the currency, while tightening policies strengthen it. Investing in these currencies requires close attention to central bank policy movements.

Recently, the US Federal Reserve began a rate-cut cycle in September 2024, with a total reduction of 100 basis points. In contrast, the European Central Bank maintained rates in 2025, leading to euro appreciation against the dollar.

Safe-Haven Currencies: JPY and CHF

Japan and Switzerland are known for political stability and developed economies, with their central banks rarely adjusting interest rates. During global turmoil, investors flock to these currencies for safety, pushing up their exchange rates.

Additionally, due to low interest rates, many investors borrow in yen or Swiss francs to invest in higher-yield assets (carry trade). When the economy improves, they close positions for profit. This characteristic makes safe-haven currencies less volatile and suitable for risk-averse investors.

Commodity Currencies: AUD and CAD

Australia and Canada’s economies heavily depend on commodity exports. When iron ore and oil prices rise, export income increases, causing their currencies to appreciate. Conversely, falling prices lead to depreciation.

For example, the Australian dollar, as the world’s largest iron ore exporter, has a strong correlation with iron ore prices. From 2021 to 2024, iron ore prices declined, and the AUD/USD also weakened accordingly. The cyclical nature of commodity currencies makes them relatively easier for beginners to trade.

Emerging Market Currencies: RMB, ZAR, etc.

Currencies from developing countries often offer high interest rates but come with high volatility. Political instability, large exchange rate swings, and low market liquidity make these currencies riskier. The South African rand, for example, has attractive interest rates but volatile movements, requiring cautious assessment.

Currency Selection Advice: Beginners should prioritize major, liquid currencies like USD, EUR, and AUD, which have relatively stable exchange rates and higher liquidity. Combining safe-haven and commodity currencies is suitable for most novice investors.

Current Major Currency Trends in the Market

EUR/USD###

The EUR/USD pair is the most traded in the world, influencing the entire forex market. The Fed’s rate cut decision at the end of 2024 contrasted with the ECB’s unchanged rates, pushing the euro to a four-year high.

Market concerns about US policy uncertainty and the ECB’s stronger independence make the euro a more favored choice.

USD/JPY(

The yen is a common tool for carry trades, with its volatility often reflecting global risk appetite. The Bank of Japan paused rate hikes due to US tariff risks but is expected to resume hikes before year-end.

The divergence in monetary policy between the US and Japan is expected to narrow the interest rate gap, but domestic political uncertainties in Japan may still influence the trend. In the short term, this currency pair is expected to fluctuate within a range.

) GBP/USD### The British pound’s strength this year mainly stems from a weakening dollar rather than improvements in the UK’s fundamentals. The UK economy shows sluggish growth, with rate cut expectations, so the pound is likely to remain range-bound and not surge unilaterally.

( USD/CHF) The Swiss franc is widely valued for its safe-haven and neutrality. As the US economy faces trade and fiscal challenges, the dollar’s safe-haven appeal is challenged, highlighting the Swiss franc’s role as a safe haven.

The dollar index is expected to weaken overall, and the Fed’s rate cut expectations will support the Swiss franc.

Five Key Factors Influencing Exchange Rate Fluctuations

1. Inflation Rate Differentials

Currencies of low-inflation countries tend to appreciate. When a country’s inflation rate remains lower than others, its goods and services prices rise more slowly, making its currency more valuable and attracting foreign capital inflows, pushing up the exchange rate.

( 2. Interest Rate Levels Higher interest rates attract foreign capital, increasing demand for that country’s currency. Central bank rate hikes usually push up the currency’s value, while rate cuts exert downward pressure.

) 3. Government Debt Levels High-debt countries find it harder to attract foreign investment and may experience currency depreciation due to repayment risks. Investors assess government debt sustainability and make buy/sell decisions accordingly.

4. Trade Conditions Changes

Countries with export growth exceeding import growth see increased foreign exchange income and higher demand for their currency, leading to appreciation. Conversely, trade deficits cause depreciation. Price fluctuations of commodities are especially important for commodity-exporting countries.

( 5. Political Stability Politically stable and predictable countries attract more foreign investment, often leading to currency appreciation. Political turmoil tends to cause depreciation.

How Beginners Can Profit from Foreign Currency Investments: Practical Guide

) Two-Way Trading Mechanism Unlike stocks, which only support “buy low, sell high,” the forex market supports two-way trading.

Long position: Expectting euro appreciation, buy EUR/USD, and when euro appreciates, close position for profit.

Short position: Expecting euro depreciation, sell EUR/USD first, and when euro depreciates, buy back to profit from the spread.

This flexibility greatly expands profit opportunities.

Core Trading Steps

Select currency pairs: Analyze the fundamentals of both currencies—policy directions, interest rate differentials, economic data, major export changes, etc. This is key to decision-making. For example, if the US is expected to cut rates while Japan maintains high rates, consider going long JPY/USD.

Develop a trading plan: Set specific entry points, stop-loss, and take-profit levels. This is the core of risk management. Avoid trading based on feelings; follow your plan.

Control emotional swings: Market volatility can trigger panic and irrational decisions. Maintain a stable mindset and strictly follow your plan.

Choose reliable platforms: Trading platforms should have security certification, transparent fees, comprehensive trading tools, and a wide range of products.

Advanced Tips and Risk Warnings for Foreign Currency Investment

1. Invest only in currencies you are familiar with

Beginners should focus on major, high-volume currencies like USD and JPY, avoiding obscure currencies. Lack of familiarity increases decision difficulty.

2. Keep track of market trends

Foreign exchange rates are affected by multiple factors. Constantly monitor international news, economic data releases, and central bank statements. Subscribing to professional financial media is recommended.

3. Diversify asset allocation

Don’t concentrate all funds in a single currency or investment method. Combine USD fixed deposits, AUD funds, JPY margin trading, etc., to form a diversified portfolio.

4. Master stop-loss and take-profit techniques

This is the most critical skill in margin trading. Set reasonable stop-loss orders to prevent margin calls, and set take-profit orders to lock in gains. Limit trading to no more than twice a day to avoid overtrading.

5. Accurately grasp entry timing

Avoid chasing highs or selling lows. Develop a plan in advance and wait for the right moment to place orders. Waiting for a trend to form is the simplest and most effective method—usually taking 5 minutes or longer. Once the trend is clear, consider building a position.

6. Practice with demo trading

All strategies should be thoroughly tested in a simulated environment before real trading. This allows verification of strategy effectiveness and risk control without risking real funds.

Summary: The Correct Attitude to Enter Foreign Currency Investment

Foreign currency investment is not out of reach. The key is understanding market mechanisms, choosing suitable investment methods, developing rational plans, and continuous learning.

Beginners can start with foreign currency fixed deposits to experience exchange rate fluctuations; progress to foreign currency funds for more flexibility; and experienced traders can venture into margin trading for higher returns but with greater risks.

Regardless of the method chosen, remember: Understanding risks is more important than chasing returns, and stable profits are more valuable than one-time big gains. In this largest global financial market, patience and discipline are the true investment weapons.