The spot rate on the euro is $1.33 and the 180-day forward rate is $1.34. Which of the following is correct? The difference between the two rates means
A) interest rates are higher in the U.S. than in the Eurozone
B) the euro has risen in relation to the U.S. dollar
C) the inflation rate in the Eurozone is declining
D) the euro is expected to fall in value relative to the U.S. dollar

Question

Quizplus · Accepted Answer

The forward rate being higher than the spot rate suggests that the euro is expected to be stronger relative to the dollar in the future, which often implies higher interest rates in the U.S. compared to the Eurozone. This is because investors demand a higher interest rate for holding a currency that is expected to depreciate.

The Spot Rate on the Euro Is $1