JEFMS Journal

ABSTRACT:

This paper is using the market-based and the currency beta (β) theories of exchange rate forecasting. It is testing empirically these theories by using data, spot and forward rates, from seven different countries with respect the U.S., as our domestic country. The countries are: U.S. with Euro-zone, Mexico, Canada, U.K., Switzerland, Japan, and Australia. The results show that both methods, the market-based forecasting and the currency betas are giving very good forecasting for these seven exchange rates by minimizing the standard error of the regression (SER) and the root mean squared error (RMSE). Of course, uncertainty exits always in the forecasting of any economic variables, due to unanticipated public policies (monetary, fiscal, and trade) and other “innovations” in our financial markets and new philosophies in our way of living.

KEYWORDS:

Demand for Money and Exchange Rate, Foreign Exchange, Forecasting and Simulation, Information and Market Efficiency, International Financial Markets

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