Given that the purchasing power parity (PPP) suggests an exchange rate of $1.30 per euro, while the current spot rate stands at $1.38 per euro, what would be the expected long-term movement of the dollar relative to the euro?

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Expect the dollar to weaken compared to the euroExpect the dollar to strengthen compared to the euroExpect the dollar/euro exchange rate to stay unchangedHave no expectations about future changes in the dollar/euro rate

Explanation

Since the spot rate ($1.38) is above the PPP estimate ($1.30), the dollar is currently undervalued relative to the euro. Over the long term, this implies the dollar is likely to appreciate against the euro to move closer to the PPP value.