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Top Currency Strategy of 2016 Turns Perilous as Risks Rise

  • Politics are interrupting rally in emerging-market currencies
  • Rand’s quarterly carry-trade return has halved to 5%
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Currency traders basking in the relative calm of August markets just received a jarring reminder of the dangers of chasing high yields.

Recent flare-ups in political risk in emerging markets weakened their currencies and helped send returns on carry trades -- borrowing in locales with relatively low interest rates and investing the proceeds in places where they’re higher -- tumbling from the highest in a year. Turmoil among South Africa’s political leadership this week prompted such a drop in the rand against the dollar that it cut the return on this quarter’s best carry trade in half.