Beginner's Guide to Buying US Dollars and Foreign Currency Investments: Master the Secrets of Exchange Rate and Interest Rate Differentials to Get Rich from Scratch

Why is foreign currency investment so popular? Simply put, during a time when Taiwan’s interest rates are persistently low, buying US dollars and other foreign currencies has become an essential option for many people’s asset allocation. But the question is, how to choose? How to buy? To truly make money?

This article will take you deep into the core logic, practical methods, and market choices of foreign currency investment, helping you progress from a beginner to an informed investor.

What are you fundamentally earning when buying US dollars and foreign currencies?

Many people think that buying foreign currencies is just simple currency exchange, but the underlying logic is much more complex than that. The main sources of profit in foreign currency investment are two: exchange rate difference and interest rate differential.

Exchange rate difference refers to the profit generated from buying and selling the same currency pair at different times. For example, if you buy US dollars at 33 TWD per USD and sell when the USD appreciates to 35 TWD, the 2 TWD difference is your exchange rate gain. This is the primary profit source for short-term trading.

Interest rate differential comes from the differences in benchmark interest rates across countries. For example, currently, Taiwan’s fixed deposit rate is about 2%, while the US fixed deposit rate is around 5%. The 3% interest rate gap represents potential profit. This is the main way long-term investors earn returns.

But there’s a key trap: Be careful of earning interest rate differential but losing on exchange rate. Suppose you buy USD because you expect higher US interest rates, but the USD depreciates. The 5% interest income could be wiped out or even turn into a loss due to exchange rate movement. Therefore, before entering, you must clarify whether you’re pursuing interest income or short-term price differences.

Three ways to buy US dollars, which one should beginners choose?

In Taiwan, there are three mainstream methods for foreign currency investment:

Foreign currency fixed deposit — The simplest conservative approach

Open a foreign currency account at a bank and deposit USD or other currencies, earning interest periodically. This is the lowest-risk method but also the least liquid. If you need to terminate before maturity, interest may be discounted, or you could even incur a loss. If you just want steady interest rate gains, fixed deposits are fine, but there are more flexible alternatives now.

Foreign currency funds — A balanced approach with flexibility and returns

Money market funds or currency ETFs allow you to buy and sell without binding contracts. Returns are between savings and fixed deposits, with management fees usually between 0.5% and 0.8%. The key is, you can invest directly in TWD, and the fund company handles currency exchange, saving you the hassle of converting yourself. This is a good choice for those who want to keep their funds flexible.

Forex margin trading — Higher returns but riskier advanced option

This is real currency trading. You’re not saving money or buying funds but predicting currency movements and betting accordingly. Since currency volatility is relatively small, margin trading often uses leverage of 50 to 200 times, allowing small capital to control large positions. The benefits are 24-hour trading, T+0 mechanism, and low entry barriers. The downside is the extremely high leverage risk. According to Australian regulatory advice, leverage on major currency pairs should be below 30 times to prevent margin calls.

Best timing and strategies for buying US dollars

Step 1: Choose your target currency

Not all foreign currencies are suitable for beginners. Taiwanese banks typically offer 12 currency options, including USD, AUD, CAD, GBP, JPY, EUR, etc. These currencies can be grouped into four categories:

• Policy-driven currencies (USD, EUR): Exchange rates mainly influenced by central bank policies; rate usually drops with rate cuts, rises with rate hikes
• Safe-haven currencies (JPY, CHF): Countries with stable politics and low risk, often sought during market turbulence
• Commodity currencies (AUD, CAD): Highly correlated with commodity prices, easier to track trends
• Emerging market currencies (CNY, ZAR): High interest rates but volatile, with higher risks

For beginners, it’s recommended to start with safe-haven and commodity currencies. The former is stable and reliable, the latter easier to grasp. Of course, buying USD is always the first choice because of its liquidity and market depth.

Step 2: Understand what drives exchange rate fluctuations

To profit from foreign currency investment, you must understand what influences exchange rates:

• Inflation rate: Countries with low inflation tend to see their currencies appreciate
• Interest rates: Central bank rate hikes attract foreign capital, pushing up the currency
• Government debt: High debt levels can lead to currency depreciation
• Trade conditions: Strong export nations tend to see their currencies appreciate
• Political stability: Stable governments attract foreign investment

For example, USD is heavily influenced by Federal Reserve policy decisions. When the Fed signals rate cuts, the USD often weakens; rate hikes tend to strengthen it.

Step 3: Develop a trading plan

No matter which investment method you choose, plan ahead:

• Set entry and exit points (avoid chasing highs or selling lows)
• Clearly define stop-loss and take-profit levels (capital protection is paramount)
• Control the size of each trade (recommend a maximum of 2 trades per day)
• Wait for a clear trend to form (usually over 5 minutes or more) before entering

How does the current market look? Latest trends of major currency pairs

EUR/USD(EUR/USD)

This is the most traded currency pair globally, involving the two largest economies. This year, the Federal Reserve has started a rate-cut cycle, while the European Central Bank remains relatively conservative, causing the euro to strengthen to a four-year high. Analysts believe that compared to US policy uncertainty, the ECB’s independence is higher, so the euro has short-term support.

USD/JPY(USD/JPY)

The yen has always been popular for carry trades. Recently, the Bank of Japan paused rate hikes, while the Fed has started cutting rates, narrowing the US-Japan interest rate differential. In the short term, USD/JPY may fluctuate, with market forces in a tug-of-war.

GBP/USD(GBP/USD)

The pound’s rise this year mainly stems from a weakening dollar rather than fundamental improvements in the UK economy. Considering the UK’s economic weakness and expectations of rate cuts, the pound is unlikely to have a one-sided rally; range-bound movement is common.

USD/CHF(USD/CHF)

The Swiss franc is a safe-haven asset. During geopolitical risks, it tends to appreciate. This year, the USD’s safe-haven aura has faded, and the franc has become a new favorite for capital preservation, continuing to strengthen.

Golden rules for investing in foreign currencies

1. Focus on familiar currencies

Foreign exchange markets are chaotic, but the most traded are USD, JPY, EUR, etc. Beginners should focus on these major pairs rather than blindly chasing high-yield obscure currencies. High yields often come with high risks; for example, although the South African rand offers attractive rates, it is highly volatile.

2. Keep an eye on market news

Central bank meetings, economic data, geopolitical events all directly influence exchange rates. Regularly follow major international financial media to stay informed.

3. Diversify your portfolio

Hold a mix of USD fixed deposits, AUD funds, JPY cash, etc., to effectively hedge against risks of a single currency. Don’t put all your chips into one currency.

4. Learn to set stop-loss and take-profit

Especially in margin trading, setting reasonable stop-loss levels is crucial. Place stops near recent highs or lows to avoid small losses turning into big ones. Also, set take-profit points; don’t be greedy.

5. Timing is key

Don’t chase highs or sell lows; wait for a clear trend before entering. The simplest method is to observe 5-minute, 30-minute, or 2-hour charts to identify a clear upward or downward trend before placing orders.

Start investing in foreign currencies with US dollars now

Foreign currency investment is essentially a race against the global economic cycle. Once you understand the operation of exchange rate differences and interest rate differentials, grasp the direction of central bank policies, and master risk management, buying US dollars and other currencies becomes a strategic investment rather than blind gambling.

The core is simple: choose the right investment method (fixed deposit, fund, or margin), align with your risk tolerance and time commitment, continuously learn market knowledge, and adjust your strategy accordingly. Don’t rush to get rich overnight; steady compound growth is the ultimate secret of foreign currency investment.