Abstract
The exchange rate is an important indicator for investors and governments as well as a verdict on economic prospects. The euro reached its lowest point in 20 years on August 22, 2022, falling below parity with the dollar and terminating a one-to-one exchange rate with the American currency. The event's great significance provides paramount motivation for us to construct a suitable model capable to forecast it. Numerous modeling methods are proposed to predict and analysis the exchange rate. This paper discussed the applicability of a univariate ARIMA model. Moreover, a multivariable ARIMA model, i.e., four macroeconomic variables supposed influential to the change of exchange rate, were introduced in the AR part of the ARIMA model. For the training set, data is gathered on a monthly basis from January 1999 to December 2021, while the period forecasted is the plunge event from January to August, in 2022. Their 8-month long forecasting experiments reveal that the univariate ARIMA model has no ability to forecast the trend of the exchange rate. In general, the multivariate regression model with ARIMA errors is capable of forecasting the historical change of the USD/EURO spot exchange rate. However, its performance totally depends on the quality of the predicted predictors, which are the four macro-economic variables in this study.
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