South African bank notes featuring an image of former South African President Nelson Mandela are displayed at an office in Johannesburg, Jan. 17, 2013.
Reuters / Siphiwe Sibeko
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Investors reaping handsome returns on emerging-market currencies this year might do well to heed a warning once made by Harvard economist Jeffrey Frankel, who likened carry trading to "picking up pennies in front of a steamroller". Economic theory – and history – suggest the strategy of borrowing where interest rates are low to invest in high-yielding currencies is prone to the risk of a sharp reversal when too many investors pile into the trade. Strategists at Bank of America Merrill Lynch warned last week that sentiment on emerging-market currencies is already reaching "exuberant levels". Saxo Bank A/S' chief currency strategist says now is the time to take profits.Investors from BlackRock Inc. to Man Group PLC have poured money into emerging-market currencies this year to profit from interest as high as 12 percent compared with rates close to zero in the U.S. and European Union.
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