Advancing Exchange Rate Forecasting: Leveraging Machine Learning and AI for Enhanced Accuracy in Global Financial Markets

TL;DR

This paper demonstrates that advanced machine learning models, especially LSTM neural networks, significantly improve the accuracy of USD/BDT exchange rate forecasting, outperforming traditional methods and providing valuable insights for traders and policymakers.

Contribution

The study introduces a deep learning approach using LSTM for forex prediction, achieving high accuracy and outperforming traditional models like ARIMA.

Findings

LSTM achieved 99.449% accuracy in exchange rate forecasting.

Gradient Boosting Classifier provided a 40.82% profitable trade rate.

Deep learning models outperformed traditional statistical methods.

Abstract

The prediction of foreign exchange rates, such as the US Dollar (USD) to Bangladeshi Taka (BDT), plays a pivotal role in global financial markets, influencing trade, investments, and economic stability. This study leverages historical USD/BDT exchange rate data from 2018 to 2023, sourced from Yahoo Finance, to develop advanced machine learning models for accurate forecasting. A Long Short-Term Memory (LSTM) neural network is employed, achieving an exceptional accuracy of 99.449%, a Root Mean Square Error (RMSE) of 0.9858, and a test loss of 0.8523, significantly outperforming traditional methods like ARIMA (RMSE 1.342). Additionally, a Gradient Boosting Classifier (GBC) is applied for directional prediction, with backtesting on a $10,000 initial capital revealing a 40.82% profitable trade rate, though resulting in a net loss of $20,653.25 over 49 trades. The study analyzes historical trends, showing a decline in BDT/USD rates from 0.012 to 0.009, and incorporates normalized daily returns to capture volatility. These findings highlight the potential of deep learning in forex forecasting, offering traders and policymakers robust tools to mitigate risks. Future work could integrate sentiment analysis and real-time economic indicators to further enhance model adaptability in volatile markets.