Exchange rate stability plays an important role for economic and financial stability and exchange rate movements have significant and important effects on trade balance, resource allocation, domestic prices, interest rates, inflation level, national income and other key economic variables. So what about forecasting exchange rate movements using these fundamental economic variables. Economists have long believed that economic fundamentals determine the exchange rate. However, in the early 1970s, after the collapse of the fixed exchange rate regimes of the Bretton Woods system, the excessive volatility and disorderly non-linear movements of the exchange rate became mysteries that traditional exchange rate theory cannot. explain (1.pdf). Wang Jing believes that "there is no definitive evidence that the economic variable can predict the exchange rate of currencies of countries with similar inflation rates", which Meese and Rogoff's studies called "the puzzle". head of the disconnection of the exchange rate”. So why is it so difficult? to forecast exchange rate movements?At the very beginning, we start from the two extreme forms of exchange rate regime, namely fixed exchange rate and floating exchange rate. Without intervention from monetary authorities, the exchange rate is determined at all times by demand and supply. of the market. Whenever supply does not equal demand, the exchange rate changes. However, the reality turns out to be much more complicated. Predicting exchange rate movements is not as simple as the ideal theory described. for example, fundamentally based exchange rate models including the monetary model, the Mundell-Fleming model and the Dornbusch model. The monetary model relates exchange rate movements to the balance of payments...... middle of paper ......, it incorporates expectations and combines with the short-run and long-run properties of the model MF and monetary mode respectively. The theory of overcoming is a significant contribution made by the Dornbusch model. Of course, any predictability found in such a model is of limited use to financial market analysts and policy makers who face the unenviable task of forecasting exchange rates in real time. imply that these models may not have the ability to predict and, conversely, it is the exchange rate that achieves predictability on these fundamentals. Under ideal conditions, the ratio of currencies of different countries reflects the differential in their purchasing power. In reality, the exchange rate can be both a sign of the national credit level, a tool for the government to regulate the economy and a weapon of trade warfare..