May 22 (Bloomberg) -- Brazil’s real, South Africa’s rand and Turkey’s lira offer the “largest upside” as investors return to the so-called carry trade, Barclays Plc said.

A global pickup in investor demand for higher-yielding assets and signs the worst of the global recession is over “bode very well for the comeback of the emerging-market carry trade,” analysts including Andrea Kiguel in New York wrote in a report. The carry trade refers to the practice where investors borrow funds in a country with lower interest rates and then invest the money in nations where returns are higher.

Brazil’s real has gained 18 percent in the past three months against the U.S. dollar while Turkey’s lira has advanced 10 percent. South Africa’s rand is up 22 percent, the best performing emerging-market currency in the past three months.

“As the decline of global risk aversion gives way to the re-pricing of U.S. dollar, we see potential for emerging-market foreign exchange to continue rallying,” analysts including Andrea Kiguel in New York wrote in a report.

Emerging-market currencies will also attract investors because interest rates in developing nations remain high relative to those in industrialized countries, Barclays said.

The dollar declined beyond $1.40 against the euro today for the first time since January on concern U.S. creditworthiness deteriorated and near-zero borrowing costs made the nation’s assets less attractive to investors.

Turkey’s key benchmark interest rate stands at 9.25 percent, compared with a range for overnight loans between banks of zero to 0.25 percent in the U.S. Brazil’s benchmark interest rate is 10.25 percent.

‘Excess of Euphoria’

Continued gains in emerging-market currencies have increased the risk that central banks may buy dollars in the foreign-exchange market to slow the rally, Barclays said.

Brazil’s central bank began buying dollars on May 8, the first purchases since September. Yesterday, Brazilian central bank President Henrique Meirelles cautioned investors not to load up on bets on the real as signs an “excess of euphoria” is building on the pace of the country’s economic recovery.

“With conditions set for continued emerging-market foreign-exchange strength, it is likely that emerging-market central banks start (or continue) to lean against the appreciation wind, slowing or limiting the aforementioned upside as a result of dollar weakness and lower risk aversion,” Barclays said.

For Related News and Information: Top stories from Latin America: TOPL <GO> Top stories in emerging markets: TOP EM <GO>

Last Updated: May 22, 2009 15:02 EDT