Foreign Currency Investment Beginner's Guide: Dual Gains from Exchange Rate and Interest Rate Differentials, How Beginners Can Seize Profit Opportunities?

Why Invest in Foreign Currencies? From Exchange Rate Risks to Wealth Growth

If all your assets are denominated in the same currency, you face a hidden risk—exchange rate risk. Imagine when your home currency depreciates significantly, your wealth shrinks. That’s why more and more Taiwanese investors are turning their attention to foreign currency investments.

The advantages of foreign currency investment mainly lie in several aspects. First is low entry barrier—opening a foreign currency account at a bank is very convenient, whether via app or in person. Second is more transparent and fair trading—investors participating in foreign currency transactions come from all over the world, making manipulation of a specific currency’s trend difficult, and it’s harder to be artificially controlled compared to the stock market. Finally, 24-hour trading—as soon as you see the price move against your position, you can stop loss and exit at any time, which stock markets cannot do.

From the perspective of asset allocation, holding different currencies can hedge against the risk of your home currency. This is why, even in a low-interest-rate environment, Taiwanese still allocate assets in foreign currencies.

Foreign Currency and Forex: Two Concepts You Need to Understand

Many people confuse “foreign currency” and “forex,” but they are actually different.

Foreign currency refers to all currencies outside your own country, such as USD, EUR, JPY. It is a form within the forex market.

Forex has a broader scope, including all assets expressed in foreign currencies—bank deposits, government bonds, bills, etc.—any means of payment used for international settlement. Simply put, forex is at the national level as international reserves, while foreign currency is at the investor level as currency choices.

Forex trading includes four main categories: trading foreign banknotes and coins, trading foreign currency payment vouchers, trading foreign currency securities (bonds, stocks, etc.), and trading other foreign currency assets.

Conclusion: Forex trading encompasses buying and selling foreign currencies, and foreign currency trading is just one form within forex trading.

How Does Foreign Currency Make Money? The Difference Between Exchange Margin and Interest Spread

Many know that buying and selling foreign currencies can be profitable, but the specifics are less clear. There are actually two main ways: exchange margin and interest spread.

Exchange margin refers to the difference in exchange rates between two currencies. For example, if you buy USD at 33 TWD/USD, and later USD appreciates to 35 TWD/USD, selling at this rate earns you a 2 TWD profit per unit. This difference is the exchange margin.

Interest spread is the difference in benchmark interest rates between countries. For example, Taiwan’s fixed deposit rate is 2%, and the US is 5%, so the 3% difference is potential profit—you can earn this interest spread by depositing in USD.

But be especially cautious: be careful of earning interest spread but losing on exchange margin. Suppose you buy USD at 33, earning 5% interest, but USD depreciates to 30 TWD when you sell, resulting in an overall loss. This is a typical case of earning interest but losing on exchange margin.

Therefore, before trading, you need to clarify your goal—are you pursuing long-term interest income or short-term price difference gains? Also, fully assess the risk of exchange rate fluctuations.

Types of Foreign Currencies: Which Ones Do Taiwanese Prefer to Invest In?

Taiwanese banks generally offer 12 major foreign currencies for investment: USD, EUR, JPY, GBP, CHF, AUD, CAD, HKD, NZD, SGD, ZAR, SEK.

These currencies can be divided into four categories:

Policy-oriented currencies

Exchange rates mainly influenced by central bank monetary policies, typical representatives are USD and EUR. When central banks adopt easing policies, exchange rates tend to fall; when tightening, they rise. Investing in these currencies requires close attention to central bank interest rate decisions.

Safe-haven currencies

Mainly JPY and CHF. These countries are known for stability, developed economies, low political risk, and central banks rarely adjust interest rates. During market turbulence, investors flock to these currencies for safety. Many borrow these low-interest currencies to arbitrage, then exchange back when the economy improves.

Commodity currencies

AUD and CAD are typical examples. These countries mainly export bulk commodities. When commodity prices rise, more local currency is needed to buy the same amount of goods, causing the currency to appreciate. For example, Australia is the world’s largest iron ore exporter; when iron ore prices fall, the AUD also depreciates. These currencies tend to be easier to analyze, suitable for beginners learning trend trading and day trading strategies.

Emerging market currencies

Including CNY, ZAR, etc. These countries are in rapid development, with higher interest rates, but political instability, small liquidity, and large spreads entail higher risks. ZAR offers the most attractive interest rates but also fluctuates greatly, requiring cautious evaluation.

When choosing currencies, besides considering high fixed deposit rates, also consider exchange rate stability and international liquidity. USD, EUR, AUD are relatively stable with lower risks and are most favored by investors. For beginners, safe-haven and commodity currencies are easier to start with—safe-haven for stability, commodity for trend clarity—combining both is most suitable.

Comparing Three Investment Methods: Fixed Deposit, Funds, or Margin Trading?

In Taiwan, investing in foreign currencies mainly involves three methods:

Fixed Currency Deposit: The safest way to earn interest spread

Fixed deposits are the simplest and lowest-risk choice. You just need to open a foreign currency account at a bank (age 20+), then deposit foreign currency to earn interest periodically.

The downside is low liquidity—if the exchange rate hits your target but the deposit isn’t matured, early withdrawal incurs interest penalties. If you only keep it as a savings account, the interest is very low. In such cases, foreign currency funds are a more flexible alternative.

Foreign Currency Funds: A balanced option with flexibility and returns

Funds don’t require locking in a term, can be bought and sold anytime, with returns between savings and fixed deposits. You invest in TWD, and the fund company handles currency exchange, with main gains from interest and exchange margin.

Common types include money market funds (e.g., USD funds) and currency ETFs (e.g., USD index ETF). This method is especially suitable for investors needing flexible fund operations.

Forex Margin Trading: A high-yield way to earn exchange margin

This is real foreign currency trading—no interest earned, only exchange margin. Because currency volatility is relatively low, high leverage (usually 50-200x) is used to amplify gains.

Operation is similar to stock trading—analyzing currency price trends, choosing the right timing to trade. The advantage is 24-hour trading, T+0 mechanism, very low entry barrier—you only need a small margin to trade various global currency pairs online.

The risk is margin call or liquidation. It’s recommended to choose reasonable leverage (below 30x) to avoid over-leverage.

Five Major Factors Influencing Exchange Rate Fluctuations

To profit in the foreign currency market, you must understand what drives exchange rate movements.

1. Inflation Rate: Countries with low inflation see their currencies appreciate. Low inflation means slow price increases for goods and services, strong purchasing power, foreign capital inflows, and rising exchange rates.

2. Interest Rates: Higher interest rates attract foreign capital because lenders get higher returns. Countries with high interest rates tend to see their currencies appreciate.

3. Government Debt: Countries with high debt levels are less attractive to foreign investors and may see their currencies depreciate. When markets expect debt deterioration, foreign investors sell bonds, causing exchange rates to fall.

4. Trade Conditions: When export prices rise faster than import prices, trade conditions improve, increasing national income and demand for the local currency, leading to appreciation.

5. Political Stability: Countries with low political risk attract foreign investment. Stable political and economic environments draw investment, while political turmoil causes depreciation.

Current Major Currency Trends Analysis

EUR/USD: Four-year high behind

Europe and the US are the world’s two largest economies, and EUR/USD is the most traded currency pair. Even tiny fluctuations impact the entire forex market.

Recently, EUR hit a four-year high because: the Fed plans to cut rates starting September 2025, while the European Central Bank maintains rates. Meanwhile, market uncertainty about USD policy rises, and the ECB’s independence and policy stability stand out. This makes the euro a relatively neutral, safe choice.

USD/JPY: Popular carry trade pair

USD/JPY is a common tool for carry trades—borrowing in low-interest Japan to invest in high-interest US.

The Bank of Japan paused rate hikes in January 2025 to assess US tariffs, but most economists expect a 25 basis point hike by year-end. Divergence in US-Japan policies increases market expectations of narrowing interest rate differentials. In the short term, JPY may continue to fluctuate, mainly influenced by domestic politics and central bank signals.

GBP/USD: Weak dollar lifts pound

The pound has strengthened this year, mainly because of a weak dollar, not improved fundamentals. The UK economy is sluggish, with rate cut expectations, and the pound is expected to remain range-bound, difficult to rise unilaterally.

USD/CHF: Safe-haven appeal intensifies

CHF is favored for its long-term stability and neutrality, becoming a preferred safe-haven currency. During economic uncertainty and market turbulence, funds flow into CHF.

In 2025, with the US mired in trade and fiscal issues, the dollar’s safe-haven appeal is challenged, making CHF’s safe-haven value more prominent. Long-term, US slowdown, Fed rate cuts, and a weaker dollar index will support CHF appreciation.

How Beginners Can Profit from Buying and Selling Foreign Currencies?

After mastering theoretical knowledge, the key is practical operation. There are two basic ways to buy and sell foreign currencies:

“Buy low, sell high”—the traditional logic—buy when prices are low, sell when high to profit from the spread.

“Sell high, buy low”—a unique feature of the forex market—since you can trade both ways. If you expect EUR to depreciate, you can first sell EUR/USD. When EUR indeed depreciates, you buy back at a lower price, making a profit.

But to truly profit, you also need to:

Step 1: Choose the target
Understand the policies, interest rates, and main export changes of the two currencies involved. For example, if you expect the US to cut rates this year and Japan to keep rates steady, you might go long JPY/USD. This is the most critical decision—your entire investment hinges on this premise, and economic data and policy meetings are vital.

Step 2: Develop a trading strategy
Based on your risk tolerance, experience, and market conditions, craft a suitable plan. Include entry and exit points, stop-loss, take-profit, and consider market risks and transaction costs.

Step 3: Keep a stable mindset
Avoid emotional trading due to market volatility. Continuous learning and practice are essential to accumulate experience and succeed gradually.

Step 4: Choose a reliable platform
Trading platforms should be safe, low-cost, equipped with tools, diverse in products, and fast in execution. Consider multiple factors to select the right platform.

Five Key Points Every Foreign Currency Investor Must Know

1. Only invest in currencies you understand
Beginners should only invest in familiar major currency pairs like USD, JPY. Despite abundant market information, the most traded and stable are these mainstream currencies.

2. Constantly monitor exchange rate fluctuations
Foreign exchange rates change frequently, influenced by markets, economy, news, etc. It’s recommended to follow international financial news sites (like CNBC, Bloomberg, Yahoo) to stay updated.

3. Diversify your holdings
Don’t put all funds into one currency. For example, hold USD fixed deposits while also investing in AUD funds to hedge risks. Once well-diversified, daily trading isn’t necessary.

4. Learn to set stop-loss and take-profit
This is the most critical skill in margin trading. Set reasonable stop-loss points to prevent margin calls, and stop-profit points to lock in gains. For example, establish a long position near a previous low, set a stop-loss. When the price drops below the low, automatically exit; when it rises, hold until momentum wanes, then close. Limit to no more than 2 trades per day.

5. Pay attention to entry timing
Never chase highs or sell at lows impulsively. Pre-plan your trades, and only execute when the timing is right—wait for a trend to form, usually over 5 minutes or longer. After the trend is established, consider participating, using different timeframes like 30-minute or 120-minute charts as references.

First Practical Step: Start with Demo Trading

Any strategy without practice is just armchair theory. The best way to learn is to use a demo account to test your trading strategies in real market conditions, evaluate risk control, without risking real money. It allows you to accumulate experience confidently.

Foreign currency investment requires a combination of knowledge, experience, and patience. From basic concepts to practical operations, learn step by step to find your own profit opportunities in the foreign currency market.