Explanation

Given:

• USD/EUR spot rate (current): 1.1800 (meaning 1 EUR = 1.1800 USD)
• USD/EUR expected spot rate in one year: 1.1650 (meaning 1 EUR = 1.1650 USD)
• USD/EUR is the amount of USD per one EUR

Step 1: Understand what the exchange rate means USD/EUR = 1.1800 means 1 EUR = 1.1800 USD

Step 2: Calculate the change in the exchange rate The exchange rate decreases from 1.1800 to 1.1650.

Step 3: Determine what this means for the dollar relative to the euro When USD/EUR decreases, it means fewer USD are needed to buy 1 EUR. This means:

• EUR is becoming cheaper in terms of USD
• USD is becoming more valuable relative to EUR
• Therefore, the USD is appreciating relative to the EUR

Step 4: Calculate the percentage change Percentage change = [(New rate - Old rate) / Old rate] × 100% = [(1.1650 - 1.1800) / 1.1800] × 100% = [(-0.0150) / 1.1800] × 100% = -0.012712 × 100% = -1.2712%

Step 5: Interpret the negative sign The negative sign indicates the USD/EUR rate decreased. Since USD/EUR is the amount of USD per EUR, a decrease means the USD has appreciated relative to the EUR.

Therefore, the expected change is an appreciation of 1.27%.

Verification:

• Initial: 1 EUR = 1.1800 USD
• After 1 year: 1 EUR = 1.1650 USD
• To buy 1 EUR, you now need fewer USD (1.1650 vs 1.1800)
• This means USD has become stronger/more valuable relative to EUR
• The magnitude of appreciation is 1.27%