Foreign Currency Investment Beginner's Guide: Mastering USD and Multi-Currency Allocation Strategies

Why Now Is a Good Time for Foreign Currency Investment

Against the backdrop of Taiwan’s prolonged low-interest-rate environment, with the average bank fixed deposit annual interest rate at only 1.7%, more and more investors are turning to foreign currencies seeking better returns. The appeal of foreign currency investment lies not only in interest rate differentials but also in its comprehensive asset allocation tools.

Currently, global central bank policies are diverging. By 2025, after multiple rate cuts, the U.S. Federal Reserve maintains a target range of 4.00%-4.25%. In contrast, the European Central Bank remains optimistic about economic growth, while the Bank of Japan has paused rate hikes due to domestic factors. This policy environment creates abundant arbitrage and exchange rate trading opportunities for investors.

Understanding Foreign Currencies and Forex: The Difference Between Two Concepts

Many beginners easily confuse “foreign currency” and “forex,” but these two have significant implications in investment practice.

Foreign currency refers to all foreign currencies other than the domestic legal tender, including physical forms like banknotes and coins. For Taiwanese investors, USD, AUD, JPY, and others are considered foreign currencies.

Forex is a broader concept, encompassing all assets and payment tools expressed in foreign currencies—bank deposits, government bonds, bills, corporate bonds, and even stocks—all fall under forex trading. In short, forex is the diverse set of payment methods a country can utilize in international trade and debt settlement.

Therefore, buying and selling foreign currencies is a specific form within forex trading, but the scope of forex trading extends far beyond physical cash transactions.

How to Profit from Foreign Currency Investment: The Dual Mechanism of Exchange Rate and Interest Rate Differentials

The main sources of profit in foreign currency investment are twofold: exchange rate and interest rate differentials.

Interest rate differential refers to the difference between benchmark interest rates of different countries. For example, Taiwan’s fixed deposit rate is 2%, while the US is 5%, making a 3% gap that can be a potential profit source. Holding USD allows earning this interest rate spread through fixed deposits or other tools.

Exchange rate differential arises from currency fluctuations. Investors profit by buying low and selling high. For example, if you buy USD at 33 TWD, and later USD appreciates to 35 TWD, selling at that point yields exchange rate gains.

Key risk warning: Interest rate and exchange rate differentials do not always profit simultaneously. Historically, investors have earned 5% USD interest but suffered a 10% loss due to USD depreciation—that’s a classic “interest gain but exchange loss” trap. Therefore, before investing, clarify your goal: pursue interest income (suitable for medium- to long-term holding) or capture exchange rate movements (requiring market sensitivity and technical analysis skills).

Three Main Ways to Invest in Foreign Currencies: Risk and Return Gradients

Depending on risk tolerance and investment horizon, investors can choose different foreign currency allocation methods.

Foreign currency fixed deposit — The most conservative choice

Fixed deposits are the most direct foreign currency investment method, mainly aiming to earn interest rate differentials. Investors only need to open a foreign currency account at a bank (available to those over 20), deposit funds for a specific term (usually 3 months to 1 year), and earn the bank’s fixed deposit interest.

Advantages include very low risk and simple operation, but liquidity is limited. Early termination before maturity incurs penalty deductions. If you want to earn interest while maintaining fund flexibility, foreign currency funds are a better option.

Foreign currency funds — Balancing liquidity and returns

Foreign currency funds do not require long-term contracts; investors can buy and sell at will, with interest rates between savings accounts and fixed deposits. These funds are usually divided into two types: money market funds (e.g., USD money market funds) and currency ETFs.

Investors can purchase directly with TWD, with the fund company handling currency exchange. Main returns come from interest and exchange rate differences. For example, money market funds typically have management and custody fees around 0.5%, offering relatively low costs. Compared to fixed deposits’ rigid terms, funds provide greater operational flexibility.

Forex margin trading — Advanced option with high leverage and high returns

Forex margin trading is designed for experienced investors. Unlike deposits and funds, its main purpose isn’t interest earning but capturing price differences through currency fluctuations.

Features include:

• Leverage of 50-200x (international regulation generally recommends no more than 30x)
• 24-hour global trading with T+0 quick settlement
• Very low entry barrier, requiring only a small margin
• Diverse trading pairs covering major global currencies

While leverage can generate high returns, it also amplifies risks. Beginners should use cautiously, starting with small amounts to test strategies, then increasing positions as experience grows.

Taiwan Banks’ 12 Common Foreign Currencies and Classification Logic

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

These currencies can be grouped into four categories based on their price-driving factors:

Policy-driven currencies — USD and EUR

Exchange rates are mainly influenced by central bank monetary policies. When a central bank adopts easing policies or cuts rates, its currency tends to depreciate; conversely, tightening policies usually appreciate the currency. Investors in these currencies should closely monitor central bank meetings and policy statements.

Safe-haven currencies — JPY and CHF

Known for economic stability and political neutrality, these currencies are preferred during global turmoil or economic uncertainty. They are also common in carry trade—borrowing low-interest JPY or CHF to invest in high-interest assets, then closing positions when conditions improve.

Commodity currencies — AUD and CAD

AUD and CAD exchange rates are closely linked to commodity prices. Australia is the world’s largest iron ore exporter, and its currency correlates strongly with iron ore prices; Canada is a major oil exporter. When commodity prices rise, demand for these currencies increases, pushing up their exchange rates, and vice versa. From 2021 to 2024, as iron ore prices declined, the AUD weakened accordingly. This correlation makes commodity currencies relatively predictable, suitable for trend trading and intraday strategies for beginners.

Emerging market currencies — RMB, ZAR, etc.

These currencies come from rapidly developing economies, often offering attractive fixed deposit rates. However, they also feature volatile exchange rates, lower international liquidity, and larger bid-ask spreads. Investing in these currencies requires careful risk assessment to avoid “interest gain but exchange loss” scenarios.

Advice for beginners: Prioritize highly liquid options like USD. Next, safe-haven currencies are suitable for conservative investors, while commodity currencies, with clear technical signals, are easier to grasp. Combining both can balance risk and return.

Five Major Factors Affecting Foreign Exchange Rates

Investors aiming to profit in the foreign exchange market must understand what drives exchange rate fluctuations.

Inflation rate: Countries with low inflation tend to see their currencies appreciate. When price increases are slow, the cost of goods and services rises gradually, maintaining purchasing power and attracting international investment. Conversely, high inflation usually leads to currency depreciation.

Interest rate levels: Higher interest rates are highly attractive to foreign capital. Elevated rates mean better returns on deposits and investments, drawing international funds and pushing up the currency’s value. The Fed’s rate decisions are central to USD movements.

Government debt: Countries with excessive government debt struggle to attract foreign investment. If markets anticipate rising debt risks, foreign investors may sell bonds, leading to currency depreciation.

Trade conditions: When export prices rise relative to imports, trade conditions improve, increasing income and demand for the domestic currency, thus appreciating the exchange rate. Conversely, declining export competitiveness can cause depreciation.

Political stability: Countries with low political risk attract more foreign investment. Sound financial and trade policies support currency value, while political turmoil can lead to depreciation.

Current Major Currency Pairs Market Insights

EUR/USD — The world’s most traded currency pair

EUR/USD dominates trading volume and influences the entire forex market. Divergence in policies between the U.S. and Europe is especially critical: when the Fed cuts rates and the ECB maintains a steady stance, the euro tends to appreciate.

Recently, policy divergence has increased, and concerns over U.S. policy independence have pushed EUR/USD to a four-year high. The ECB’s greater policy independence and lower political risk make it a relatively stable choice.

USD/JPY — The carry trade star

USD/JPY is the most common tool for carry trades. Japan’s long-standing low-interest-rate policy allows investors to borrow cheap yen and invest in higher-yield assets, profiting from interest rate differentials.

Although the Bank of Japan has shown some inclination to raise rates, recent pauses due to U.S. tariff uncertainties are expected to continue. Most economists anticipate a 25 bps rate hike within the year. This divergence suggests USD/JPY will remain volatile in the short term.

GBP/USD — A historically significant pair

The UK and US have deep trade and economic ties. Recent GBP appreciation mainly results from a weak dollar rather than UK fundamentals. As Fed policy clarity increases, GBP may face revaluation risks. Considering sluggish UK growth and rate cut expectations, GBP is likely to remain range-bound with no clear upward trend.

USD/CHF — The safe-haven asset

CHF is viewed as a safe haven due to Switzerland’s political neutrality and economic stability. During global uncertainties, the franc often appreciates sharply. Since 2025, with worsening U.S. trade and fiscal issues, the USD’s safe-haven appeal has waned, and the CHF has attracted significant international funds, pushing its rate higher. Long-term, slowing U.S. economic momentum and continued Fed rate cuts will support further CHF appreciation.

Practical Strategies for Foreign Currency Investment: From Selection to Entry

Step 1: Deeply understand the target currency

Before investing, research the country’s policy environment, interest rate trends, main exports, and geopolitical risks. For example, if the U.S. is expected to cut rates this year and Japan maintains low rates, consider going long JPY/USD. Success depends entirely on accurately predicting U.S. rate decisions.

Step 2: Develop a clear trading strategy

A strategy must include three core elements: entry point, stop-loss, and take-profit. Entry should be based on technical or fundamental analysis; stop-loss should be set within your maximum tolerable loss; take-profit should be a reasonable reward target. Also consider market costs (spread, fees) and position size risk exposure.

Step 3: Choose appropriate trading tools

Select tools based on risk appetite and time frame. Conservative investors should choose deposits or funds; aggressive traders may try margin trading but should start small and build experience gradually.

Step 4: Time your entry carefully

Common mistakes include chasing highs or selling lows. The correct approach is to follow your trading plan patiently. Waiting for a clear trend—often over 5 minutes or longer—is key. Once the trend is confirmed, establish positions accordingly. Different traders may use 5-minute, 30-minute, or 120-minute charts based on their habits.

Essential Tips for Beginners in Foreign Currency Investment

Invest only in familiar currencies

There are many foreign currencies and market signals, but the most liquid and easiest to start with are USD, JPY, and other major pairs. Beginners should focus on these high-liquidity options and expand later.

Monitor exchange rate fluctuations in real-time

FX rates are affected by market conditions, economic data, and news events, causing frequent volatility. Regularly follow international news outlets (e.g., CNBC, Bloomberg) to stay updated, especially around central bank meetings and economic releases.

Diversify your portfolio

Avoid putting all funds into a single currency or instrument. Hold a mix of USD deposits, AUD funds, and forex positions to hedge risks. Once diversified, avoid over-trading to minimize transaction costs.

Master stop-loss and take-profit techniques

This is the most critical risk management skill. Setting stop-loss prevents large losses; stop-profit locks in gains. For margin trading, place stop-loss near support levels; if broken, exit automatically. When profits reach your target, close positions. Limit daily trades to 2 to avoid overtrading.

Avoid greed; wait for confirmed trends

Never chase highs or sell lows prematurely. Wait for a confirmed trend before entering. Patience is essential for success in foreign currency investment.

The Unique Position of USD Investment

Among various currencies, USD holds a strategic position. It is the world’s reserve currency and primary settlement tool, with the highest liquidity, narrowest spreads, and longest trading hours. The size of the U.S. economy and depth of its financial markets give the dollar a leading influence on global forex.

Therefore, even diversified investors often keep USD as a core part of their portfolio. Whether in deposits, funds, or margin trading, USD offers the most tools and trading opportunities.

Summary: From Selection to Execution

Foreign currency investment is not a mysterious or complex field. Success depends on systematic learning and practice. Start by clarifying your goals—whether seeking stable interest income or forex trading opportunities—as this determines whether to choose deposits, funds, or margin trading. Then, deeply understand the fundamentals and technicals of your target currencies, develop clear strategies, and continuously review and optimize during actual trading.

Opportunities in the forex market are abundant, but risks are also hidden. Beginners should first practice with demo accounts, build confidence and skills, then gradually invest real funds. Patience in this process will ultimately help investors find their own profit opportunities in the global financial markets.