Can foreign currency be seen as a separate asset class, in and of itself? Certainly there is a very large, and growing, segment of the investment community that is focused on 'forex trading'. Here retail investors are encouraged to play the markets by forex brokers, to engage in the sort of arbitrage and technical trading that was hitherto the preserve of the professional trader. But this approach to selling and buying foreign currency is less investment than speculation; most participants have to switch rapidly between markets, in order to maximize short term gains.

Avoid short term pain, go for long term gain

It is a sad fact that most entrants into the forex trading market, trying their hand at advanced forex trading, are stripped of their funds in short shrift. To be seen as a potential long term investment class, those buying foreign currency need a very different perspective. But such an approach can be rewarding, as long as the investor takes care to assess the potential currency plays, and they have a good economic literacy.

The basis of the currency markets is foreign exchange; participants are buying foreign currency with their home currency. This is done for all sorts of reasons, from paying for imported goods, to the purchase of foreign currency by tourists, and onto large scale capital movements into high returning foreign currencies. The rate of exchange between two pairs of currencies in a cross depends on the relative demand between the two currencies.

A currency that has better rates of returns for investors, and is a net exporter to your home country, will naturally have a higher demand, therefore the exchange rate will be said to be strong, and may be on an increasing trend. The rate of exchange will, however, vary as the economy of the foreign country changes relative to your own- and there are a lot of noisy fluctuations day by day, as new events buffet supply and demand.

Do your research to earn your return

So how can an investor exploit such a seemingly turbulent market? By taking the long view, and paying careful attention to the predicted relative strengths of economies across the globe. For instance, you may for the view, after careful research, that India is in line for a long term improvement relative to the US. You think that its currency, the Rupee, will appreciate over the next 24 months. To take advantage, you will be buying foreign currency from India, using your US Dollar investment funds. Then, if your predictions are on the money, the Rupee will strengthen, and you will get considerably more Dollars back when you sell the Rupees.

But for buying foreign currency to work as an investment decision, you need to be confident of long term trends, and to regularly monitor the situation, to ensure that your economic point of view hasn't been overtaken by events.