Complete Guide to Foreign Currency Investment: Master the Three Main Ways to Profit from Forex and Market Mechanisms

In the era of low global interest rates, an increasing number of investors seeking higher returns are turning to the foreign currency market. Taiwan’s legal tender is the New Taiwan Dollar, and all other currencies are referred to as foreign currencies. Many investors are aware of the mechanisms for earning through forex trading but may not fully grasp the true profit strategies. This article will delve into the core logic of foreign currency investment, mainstream investment methods, currency characteristics analysis, and practical risk management advice.

Foreign Currencies and Forex: Concept Distinction and Trading Essence

Foreign currencies refer to currencies other than the domestic currency, while forex encompasses a broader concept—including foreign banknotes, deposit certificates, government bonds, corporate bonds, and other international payment instruments. In short, forex trading involves buying and selling foreign currencies, and currency trading is the specific practice of forex transactions.

Forex trading mainly serves international trade settlement, capital allocation, and national reserves. In contrast, foreign currency investment focuses more on value-added opportunities in payment for goods and currency exchange. Understanding this distinction is crucial for investors to formulate effective strategies.

Dual Mechanisms for Profiting from Forex: Exchange Rate Difference and Interest Rate Differential

Returns from foreign currency investment come from two dimensions: exchange rate difference and interest rate differential.

Exchange rate difference refers to the price difference when buying and selling foreign currencies at different times. For example, buying USD at 33 NT dollars per USD, and later exchanging at 35 NT dollars per USD, yields a profit of 2 NT dollars per USD. This profit depends entirely on predicting exchange rate movements.

Interest rate differential arises from differences in benchmark interest rates across countries. Currently, Taiwan’s bank fixed deposit annual interest rate is about 1.7%, while the US fixed deposit rate can reach 5%. Theoretically, investors can profit from this 3% interest rate gap. However, real-world situations are often complex—investors may earn interest but suffer larger losses due to currency depreciation. For instance, buying USD at 33 NT dollars per USD, earning 5% USD interest, but if the USD depreciates to 30 NT dollars per USD, the overall position still results in a loss.

Therefore, successful foreign currency investment requires simultaneous assessment of exchange rate risk and interest rate returns to avoid the dilemma of “earning the interest differential but losing on the exchange rate.”

Comparing the Three Main Investment Methods: Characteristics, Risks, and Suitable Audience

Foreign Currency Fixed Deposit: Stable returns, limited liquidity

Foreign currency fixed deposits are the most entry-level option. Investors need to open a foreign currency account with a bank, deposit funds for a specified term, and receive periodic interest income.

Advantages: Low risk, simple operation, suitable for investors with low tolerance for exchange rate fluctuations.

Disadvantages: Very low liquidity. If the exchange rate reaches an ideal conversion point but the fixed deposit has not matured, early withdrawal will incur interest deductions. In comparison, savings account interest rates are too low, creating a dilemma of entering or exiting.

Foreign Currency Funds: Flexible allocation, intermediate between the two

Foreign currency funds offer a more flexible solution. Investors can directly invest with NT dollars, with the fund company handling currency exchange, allowing for buy and sell transactions at any time without lock-in.

Common products include money market funds (e.g., UBS USD Fund) and currency ETFs (e.g., Yuanta USD Index ETF). These funds have annual management fees of about 0.5% to 0.6%, with returns between savings and fixed deposits.

Advantages: High flexibility, transparent fees, suitable for investors needing to adjust positions anytime.

Disadvantages: Moderate returns, management and custody fees will eat into profits.

Forex Margin Trading: High leverage, high returns, high risk

For experienced investors, forex margin trading offers opportunities to amplify gains exponentially. Traders only need to deposit a small margin (usually 2% to 5% of the trade amount) to control positions tens or hundreds of times larger.

Core advantages:

• 24-hour trading: The global forex market operates around the clock, allowing traders to enter and exit at any time
• Two-way trading: Can go long or short, providing flexibility to respond to market movements
• Low entry barrier: Initial capital requirements are much lower than stocks or futures

Core risks: Leverage is a double-edged sword. ASIC regulation recommends that leverage on major currency pairs should not exceed 30 times. Overusing high leverage can lead to margin calls—where the account balance is wiped out instantly.

Suitable for: Traders with technical analysis skills, stable psychological resilience, and strong risk tolerance.

Why Now Is a Good Time for Foreign Currency Investment

Against the backdrop of persistently low local interest rates, foreign currency investment offers several attractive factors:

Significant interest rate differentials: Taiwan’s fixed deposit rate is about 1.7%, far below major economies like the US and Australia.

Rising demand for hedging: If all assets are denominated in NT dollars, a sharp depreciation (e.g., due to Ukraine ruble events) can rapidly erode wealth. Diversifying across multiple currencies can effectively spread risk.

High market transparency: The forex market involves participants worldwide, with no single entity able to manipulate the trend. Compared to stock markets, currency trading is more equitable.

Low trading barriers: Opening a foreign currency account is convenient, often completed via online banking apps without complex approval processes.

Mainstream Global Currencies and Investment Characteristics

Taiwan banks typically offer 12 foreign currency options: USD, EUR, JPY, GBP, AUD, CAD, CHF, SGD, HKD, NZD, ZAR, SEK.

Based on the main drivers of exchange rate movements, they can be categorized into four groups:

Policy-driven currencies: USD and EUR

These currencies’ trends are highly related to central bank monetary policies. Loose policies lead to currency depreciation; tightening policies push up exchange rates. Investors need to closely follow central bank rate decisions and policy statements.

The USD, as the global settlement currency, has the greatest influence. The EUR represents the Eurozone economy. Their interaction determines the direction of the global forex market.

Safe-haven currencies: JPY and CHF

These two countries have stable economies, low political risk, and their central banks rarely adjust interest rates. During global turmoil or bleak economic outlooks, investors flock to these currencies for hedging.

Carry trade (borrowing low-interest currencies to invest in high-interest assets) often uses JPY as the financing currency. Traders borrow JPY and invest in USD or other high-yield currencies to earn the interest differential. During market crashes, unwinding carry trades increases demand for JPY.

Commodity currencies: AUD and CAD

Australia’s main export is iron ore; Canada’s main export is oil. These currencies are positively correlated with commodity prices. When commodities rise, exporting countries need more of their currency for settlement, pushing up the exchange rate; when prices fall, the currency depreciates.

AUD’s trend is relatively easier to grasp, as iron ore prices are strongly influenced by the global economic cycle. Beginners can study commodity cycles to predict AUD movements, making it more actionable than policy-driven currencies.

Emerging market currencies: RMB, ZAR, etc.

These currencies offer high interest rates, attracting yield-seeking investors. However, political instability, volatile exchange rates, and limited liquidity often lead to large bid-ask spreads. “Earning high interest but losing everything in a currency crash” is common.

Investment advice: Besides considering fixed deposit rates, assess currency stability and international liquidity. Mainstream currencies like USD, EUR, AUD are relatively stable; beginners should prioritize these. Safe-haven currencies perform steadily, commodity currencies are easier to analyze, and combining both is most suitable for novice investors.

Currency Trends Forecast for 2025

EUR/USD

The Eurozone economy performs relatively steadily. The European Central Bank maintains policy independence, facing less political pressure than the Federal Reserve. Divergence in Fed rate cuts and ECB hold steady has pushed the euro higher. EUR/USD has hit a four-year high and may continue its strength in the short term.

USD/JPY

The Bank of Japan has paused rate hikes due to trade policy disruptions, while the Fed may resume rate cuts. Expectations of narrowing US-Japan interest differentials increase yen appreciation pressure. However, Japanese political uncertainties and changes in BOJ signals could cause volatility. In the short term, this pair is expected to fluctuate within a range.

GBP/USD

The pound’s appreciation mainly stems from a weak dollar rather than UK fundamentals. The UK economy is sluggish, and markets expect rate cuts. As the Fed’s policy outlook becomes clearer, the pound faces re-pricing risks. The outlook suggests sideways movement with no strong upward trend.

USD/CHF

The Swiss franc is a safe-haven asset and is highly sought during global economic uncertainties. With the US facing trade and fiscal issues, the dollar’s safe-haven appeal diminishes, increasing CHF attractiveness. In the medium to long term, US economic slowdown and Fed rate cuts will support CHF appreciation.

Five Major Factors Influencing Exchange Rate Fluctuations

Inflation

Countries with low inflation see currency appreciation; high inflation leads to depreciation. Low inflation indicates smaller price increases for goods and services, making exports more competitive and increasing foreign currency demand, thus strengthening the domestic currency.

Interest Rate Levels

Rising interest rates attract foreign capital inflows, boosting currency demand and exchange rates. Central bank rate hikes signal currency strength; rate cuts suggest weakness.

Government Debt

High debt countries struggle to attract foreign investment and often face rising inflation expectations. Foreign investors sell bonds, leading to currency depreciation.

Trade Conditions

When exports grow faster than imports, trade terms improve, causing currency appreciation; the opposite leads to depreciation. Commodity currencies are especially sensitive to this.

Political Stability and Economic Performance

Politically stable countries with transparent economic policies attract foreign investment, leading to currency appreciation. Political turmoil exerts downward pressure on the currency.

Practical Operations: How to Profit from Buying and Selling Foreign Currencies

Selecting Trading Targets

Deeply research the currency pairs to go long or short. Understand central bank policies, interest rate trends, and major export changes. For example, if US interest rates are expected to cut this year while Japan maintains current rates, consider going long JPY/USD.

Master the Two-Way Trading Mechanism

Traditional investments like stocks only support one-way trading (buy low, sell high). Forex markets support two-way operations—profiting from both rising and falling prices. If you anticipate euro depreciation, you can sell EUR/USD first, then buy back after the euro falls, earning the difference. This flexibility is a unique advantage of forex trading.

Develop a Clear Trading Plan

Successful trading hinges on pre-planning. Determine entry points, stop-loss, and take-profit levels, and execute strictly according to the plan.

Entry timing: Wait for a clear trend to form, usually requiring 5 minutes or longer. Once confirmed, establish positions accordingly. Traders with different risk preferences can refer to charts of 5-minute, 30-minute, or 120-minute cycles.

Stop-loss and take-profit: Always set stop-loss orders to prevent margin calls. Take-profit levels should be based on risk-reward ratios. Limit daily trades to no more than 2 to avoid overtrading.

Trend trading vs. intraday trading: Trend trading captures medium-term movements; intraday (scalping) completes entries and exits within a single day. For intraday, traders can buy near previous lows with stop-loss below those lows, aiming to profit as prices rise, and automatically close positions if the lows are broken.

Maintain a Stable Mindset

Forex markets are volatile, and investors are prone to emotional reactions to short-term fluctuations. Greed and panic are main causes of losses. Follow your trading plan, avoid chasing highs or selling lows, and wait for the best opportunities.

Five Core Recommendations for Foreign Currency Investment

1. Focus on Mainstream Currencies: Beginners should only invest in familiar major currency pairs like USD, EUR, JPY, AUD. They have high trading volume, transparent information, strong liquidity, and relatively manageable risks.

2. Continuously Monitor the Market: Exchange rates fluctuate daily, influenced by economic data, political events, and central bank statements. Subscribe to sources like CNBC, Bloomberg, Investing.com to stay updated.

3. Diversify Portfolio: Do not concentrate funds in a single currency. For example, hold USD fixed deposits while also investing in AUD funds, or maintain multiple currency positions in forex accounts to hedge risks.

4. Strictly Enforce Stop-Loss: Especially when using leverage, setting stop-loss orders is critical. Establish maximum acceptable loss levels (e.g., risk no more than 2% of the account per trade) and adhere strictly to them to protect capital.

5. Choose Appropriate Entry Timing: Do not chase highs or sell lows. Build a trading plan, set target prices, and act decisively when the target is reached. Be patient when the timing is not right.

Practice Is the Only Criterion for Truth

Any theoretical strategy lacking practical verification will ultimately be just paper talk. It is recommended that investors practice thoroughly using demo accounts before real trading. Demo accounts provide virtual funds to test strategies, assess risk control, and find the trading rhythm that suits oneself best.

Mastering the logic of foreign currency investment, choosing the right investment methods, and developing clear operational plans are essential to steadily profit from forex and achieve wealth growth amid global economic fluctuations.