The Risks of Investing in Foreign Currency

The following is a guest post by Jason Haze.

Investing in foreign currency can seem like one of the risk-free ways of investing, but this is not really the case. There are certain risks that come with this type of business. Ignoring these risk may leave you losing your way so it’s best to learn a thing or two about the currency trading. There are a number of things that can be done to reduce the risk but some dangers will still be there. Many people have lost some money by going in not knowing the risks they were exposing themselves to.

What are the risks of investing in foreign currency?

Politics plays a role

If you think politics doesn’t touch every pore of our lives, you might want to think again. Even investing in foreign currency is influenced by politics. Why? Just like any international investment, the currency value bears some correlation to the internal conditions of a given nation. This is why it is always important to learn the political, economic, and institutional setting in which a given currency trades.

Central banks take center stage

The performance of a currency is affected by the monetary policies that central banks have put in place. Central banks make the rules that will determine if the value of a currency will increase or decrease. The way things work in one country is different from the way it works in another. The U.S Federal Reserve is close to tightening monetary policy while there are some that are loosening theirs and creating an easy-money environment.

Emotions

This is the first advice that many people get when they start with investing in foreign currency. Many people tend to lose their cool and through everything out of the window. When making decisions, you should use facts instead of emotions. There is a lot that can go wrong and completely opposite of what was expected, but that’s the chance of going back to the drawing board and make decisions based on the facts you have. There are some investors who don’t want to close when they have a loss because they don’t want to admit they made a mistake. This means they end up losing much more money than if they had stuck to their sound investment logic.

Even the big companies fail too

Regardless of how much you know or the experience you have, there is a risk of failing. This is something you should always have at the back of your mind. There are big companies that have gone bankrupt despite having the best employee and the latest tools of the trade. This goes to show that there is always a possibility of failing no matter who you are.

Volatility

This is one of the common characteristics of investing in foreign currency. A lot can change within a short period of time and this will either make you a profit or a loss. Sometimes it happens fast before you can even decide on what you are going to do.

The currency game is one you can win, but you must be ready to hang on the long run. You need to know the dangers and how you can minimize them. This is important because it can save a lot of money in the both the short and the long run.

6 thoughts on “The Risks of Investing in Foreign Currency

  1. Agreed with the article. Direct investing in foreign currency is a difficult and potential high rewarding trade. As a good example: a lot of people made money on the Swiss frank as the central bank had a minimum level in mind it wanted to support. A clear zigzag pattern was a gold mine for traders… Until they announced that the currency could float freely… A lot of people were hit hard, even stop losses did not offer protection.

    With the global economy and all major US and EU companies doing business all across the globe, I do think we all invest in foreign currency. We might not do it directly, but the EURUSD rate has a big impact on the published results of US and EU companies.

    • I read some stories where some ppl loved the news of the SNB unpegging the CHF while others were destroyed.
      Agreed with your comment that whether we like it or not, through our investments, we always have some exposure to international currencies.

      Thanks for stopping by
      R2R

  2. Hi Jason, interesting post. it always intrigues me when people invest in things that won’t be paying them any income, so they have to time the investing correctly..not our game but interesting to read about.

    We prefer to get foreign exposure through owning foreign revenue earned by businesses. If the currency is dropping then we can buy more of companies that are in that foreign market.

    Tristan

  3. I remember around 2014 when Russia’s currency was tanking and they increased their bond to 14-17%. Several people were eyeing it thinking it was a good deal. Which we can now see the currency has devalued almost 60% against the dollar in 2 years. Perhaps now it is a good deal 😛

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