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.
