America Dollar Purchase Guide: A Guide to Foreign Currency Investment for Newbies

Want to profit from foreign currency? Want to learn the appropriate methods and strategies for purchasing foreign currency?

This article is perfect for you! This beginner's guide introduces how to trade foreign currencies and investment strategies in the foreign exchange market.

The legal tender in Japan is the yen, but any currency other than the yen is considered foreign currency. The US dollar is the most popular choice among Japanese investors, and other currencies such as the euro and the Australian dollar are also often highlighted.

Many people think that "having multiple currencies can diversify risk," but the main risk of foreign currency investment is "exchange rate fluctuations". Therefore, it is important for beginners to be able to perform market analysis and risk assessment before starting foreign currency investment and to establish a suitable investment strategy. The key to making profits in foreign currency is to grasp the timing of transactions and to choose an investment method that suits oneself, such as time deposits, currency funds, and FX trading.

In the current low interest rate environment, the average annual interest rate for Japanese yen bank time deposits is only about 1.7%, making foreign currency investments a good option. If you want to start investing in foreign currency, let's begin with this introductory guide!

What is foreign exchange trading? What is the difference from currency trading?

"Foreign currency" and "exchange" are different concepts. "Foreign currency" refers to all foreign currencies other than the domestic currency and is a form of exchange. "Exchange" refers to various payment methods that can be used for international settlements or assets denominated in foreign currency held by a country, including bank deposits and government bonds.

Currency trading includes the following:

1. Buying and selling of foreign currencies such as banknotes and coins
2. Transactions of foreign currency payment certificates such as promissory notes, deposit certificates, and savings certificates.
3. Transactions of foreign currency securities such as government bonds, corporate bonds, and stocks.
4. Transactions of Other Foreign Currency Assets

The main uses of foreign currency are for purchasing goods and currency exchange. In other words, foreign currency trading is included in foreign exchange transactions, and foreign currency trading is a type of foreign exchange transaction.

How to Make Profit with Foreign Currency?

Many people know that they can profit from foreign exchange trading, but they do not understand the specific methods. In fact, currencies can be considered a type of financial product and can be viewed as interest rate fluctuation bonds without a maturity date. Profits are derived from the "price difference and interest" and are referred to in the foreign exchange market as "exchange rate gains and interest rate differences".

Foreign exchange gains are the profits that investors obtain through currency transactions from the fluctuations in exchange rates and the timing differences between different currencies.

The interest rate differential refers to the differences in the benchmark interest rates of different countries.

For example, if the current fixed deposit interest rate in Japan is 2% and in the United States it is 5%, the 3% interest rate difference represents potential profit.

However, the 3% profit is not guaranteed. In currency trading, it is important to pay attention not only to the interest rate difference between currencies but also to the exchange rate fluctuation risk, as there is a risk of "losing the profit gained from the interest rate difference due to exchange rate losses".

For example, if you buy US dollars at 1 dollar = 140 yen, and due to exchange rate fluctuations it eventually becomes 1 dollar = 130 yen, even if you earn a 5% interest on US dollars, you may still incur an overall loss due to the loss from exchange rate fluctuations. This is an example of making a profit from interest but losing from exchange rates.

Therefore, before starting currency trading, it is important to clarify what you want to achieve. Are you aiming for high interest income while holding, or seeking profits from short-term price differences? At the same time, it is necessary to adequately assess the associated risks and develop a more comprehensive trading strategy.

Three Methods of Foreign Currency Investment: Foreign Currency Time Deposits, Currency Funds, and FX Trading

When investing in foreign currency in Japan, there are generally three investment methods: foreign currency time deposits, currency funds, and FX trading.

I have summarized the characteristics in a table:

|Investment Methods|Foreign Currency Time Deposits|Currency Funds|FX Trading| |---|---|---|---| |Trading Location|Bank|Bank/Securities Company/Fund Company|FX Platform| |Leverage|None|Low|High| |Return|Low|Medium|High| |Suitable Person|Beginner|Beginner & Experienced|Investors with Some Experience| |Purpose|Profit from interest rate differences|Profit from exchange rate differences|Profit from exchange rate differences|

Foreign Currency Time Deposit - Profit from Interest Rate Differentials

Beginners in foreign currency investment should start with fixed deposits. This is the simplest and most common low-risk investment, typically to earn the bank's fixed deposit interest rate.

If you already have a foreign currency account, you can make deposits into that account. If you do not have one, you will first need to open a foreign currency account at a bank. If you are over the age of 20, you can apply with the necessary documents.

One point to note is that foreign currency time deposits have low liquidity. If the exchange rate reaches an ideal level but the term of the time deposit has not ended, early withdrawal will result in a reduction of interest. Simply leaving it as a regular deposit yields too low an interest rate, so another method, such as a currency fund, is recommended.

Currency Fund - Make profits from exchange rate gains or dividends

Currency funds are a suitable method for those who want to manage their funds flexibly. There are no time constraints, allowing for buying and selling at any time, and they usually offer interest rates that fall between regular savings and time deposits.

Investors can directly invest in yen, with fund companies acting as intermediaries for currency exchange, and the main sources of income are interest and foreign exchange gains.

Common currency funds include MMFs and currency ETFs. For example, the UBS( Luxembourg) US Dollar Fund is a US Dollar MMF that invests in US Dollar-related products, with management and custody fees of about 0.5%. It can be purchased at banks or fund companies. The Yuan US Dollar Index ETF(00682U) is a US Dollar ETF that tracks the price trends of the US Dollar Index, with management and custody fees of about 0.6%. It can be purchased at securities firms or fund companies.

If you have investment experience and are not satisfied with small currency exchange gains or interest, you might consider FX trading.

FX trading - Make a profit from exchange rate differences

FX trading usually refers to foreign exchange margin trading. The goal here is to earn purely from exchange rate gains, rather than interest. Due to the low fluctuation rate of foreign currencies, leverage of typically 50 to 200 times is used in FX trading.

FX trading is similar to stock trading, where one analyzes currency price trends (fundamentals or technical analysis) and trades at the appropriate timing. The difference is that FX trading is more flexible and can be traded 24 hours a day, adopting a T+0 mechanism, and has a lower barrier to entry, allowing online trading with just a small amount of margin. Through FX platforms, you can trade various currency pairs from around the world, such as AUDUSD and EUR/USD.

However, margin trading carries leverage risks, and investors should choose appropriate leverage and avoid excessive leverage. For example, under the Australian ASIC regulations, a leverage of less than 30 times is recommended for major currency pairs. The timing of FX trading is also crucial; it is best to enter when trends begin to form and avoid other ineffective volatile markets.

The trading platform I use is regulated by Australia's ASIC and the Cayman Islands' CIMA as an FX broker, characterized by zero commissions, narrow spreads, and low trading costs. By opening an account, you can trade over 300 types of global financial products, including foreign exchange, gold, oil, cryptocurrencies, and U.S. stock derivatives.

Why you should invest in foreign currency?

• Low barriers to entry: The threshold for foreign currency investment is low, and foreign currency accounts can be easily opened at bank counters or through apps. Once you have an account, you can engage in investment activities such as buying and selling foreign currencies.

• Hedge: From the perspective of large asset allocation, there is foreign exchange risk when all assets are priced in a single currency. If the domestic currency declines significantly, there is a possibility that assets will shrink. For example, after the Russia-Ukraine conflict, the Ukrainian currency (UAH) became almost worthless, and while the Russian ruble (RUB) had an exchange rate, there were no banks accepting exchanges. Therefore, from the perspective of risk diversification, everyone should invest in foreign currencies.

• Transparency and Fairness: Foreign exchange trading has advantages over stock trading. Specifically, investors in foreign exchange trading come from all over the world, making it difficult to manipulate the movements of a particular currency. In a sense, foreign exchange trading is fairer than stock trading.

• 24-hour Trading: The foreign exchange market is one of the largest markets in the world, allowing for 24-hour trading, where investors can quickly cut losses and exit if they notice prices moving unfavorably. In contrast, stocks have fixed trading hours, which does not allow for this.

Types of Foreign Currency and Foreign Currency Investments Preferred by Japanese People

There are reasons why Japanese people prefer foreign currency investment. For a long time, Japan's interest rates have been at a low level, while foreign currency interest rates are relatively high. This has created a interest rate differential between the domestic currency and foreign currency, leading many Japanese people to exchange yen for foreign currency to gain from the interest rate difference.

To meet such needs, Japanese banks usually offer 12 types of foreign currencies: US Dollar ( USD ), Australian Dollar ( AUD ), Canadian Dollar ( CAD ), Hong Kong Dollar ( HKD ), British Pound ( GBP ), Swiss Franc ( CHF ), Japanese Yen ( JPY ), Euro ( EUR ), New Zealand Dollar ( NZD ), Singapore Dollar ( SGD ), South African Rand ( ZAR ), Swedish Krona ( SEK ), etc. These foreign currencies are also among the most influential currencies in the world.

These 12 types of foreign currencies can be divided into four major categories based on the main factors that influence exchange rates: policy currencies, safe-haven currencies, commodity currencies, and emerging market currencies. The points of interest vary when investing in different currencies.

1. Policy-type currency

Literally, currencies whose exchange rates are primarily influenced by policy, mainly the US dollar and the euro. These trends are closely related to the monetary policy of central banks, quantitative easing, or interest rate cuts. When a central bank adopts a loosening policy, the exchange rate usually falls. When a central bank adopts a tightening policy, the exchange rate usually rises. When investing in this type of currency, it is important to pay attention to the timing and content of the policies announced by the central bank.

2. Refugee Currency

Mainly Japanese yen and Swiss franc. The characteristics of these countries are "stability", with developed economies, little political turmoil, and central banks hardly adjusting interest rates. They belong to countries with low relevance between the domestic economy and the world, and therefore when the situation becomes unstable and the economy deteriorates, many people purchase these currencies to avoid risk, and further borrow these currencies to engage in arbitrage trading. When the economy recovers, they convert back to their domestic currency to gain both exchange rate profits and interest rate differentials.

3. Product Currency

Master