By Garth Theunissen Dec. 21 (Bloomberg) -- The rand declined to a six-week low against the dollar on speculation the interest-rate appeal of holding South African assets may diminish as the U.S. currency appreciates. The currency of Africa’s biggest economy dropped for a third day, losing as much as 1.4 percent to 7.6668 per dollar, the weakest level since Nov. 5. The rand traded 1.1 percent down at 7.6439 by 2:56 a.m. in Johannesburg, from 7.5646 on Dec. 18. “When the dollar was weakening a lot of investors borrowed cheaply in dollars to fund carry trades in other currencies,” said John Cairns, head of foreign-exchange research at Rand Merchant Bank in Johannesburg. “With the dollar bounce we’re seeing at the moment, it raises the possibility that a lot of those positions will be unwound and that puts high-yield currencies like the rand under pressure.” An unwinding of the so-called U.S. dollar carry trade may pose the biggest threat to the global economy next year, Credit Suisse AG economist Tao Dong predicted last week. The International Monetary Fund said last month the carry trade may be spurring gains in emerging-market currencies, while New York University Professor Nouriel Roubini has said that a rebound in the dollar may force investors to “rush to the exit.” Rand Merchant Bank’s Cairns expects South Africa’s rand to lose about 4.5 percent to trade at 8 per dollar by the end of next year, if the dollar recovery continues through 2010. Rand Most Vulnerable The rand weakened against all of the 16 most-actively traded currencies monitored by Bloomberg today, slipping 1.2 percent against the euro to 10.9749. The dollar traded near a three-month high against the euro today as signs of a recovery in the world’s biggest economy boosted the appeal of dollar-denominated assets. Emerging-market currencies have rallied this year as near zero interest rates in the U.S. encouraged investors to borrow in dollars and invest the money in other markets, including South Africa where the benchmark rate is 7 percent. The purchases, known as carry trades, have helped the rand rally 23 percent in 2009, making it the third-best performer among emerging markets after the Brazilian real and the Australian dollar. Benchmark interest rates of 8.75 percent in Brazil and 3.75 percent in Australia compares with deposit returns of 0.25 percent in the U.S. “We are bearish on currencies that have been driven by a liquidity-driven search for yield,” said Di Luo, an emerging markets strategist at UBS AG in London. “We are structurally bearish on the rand because it is the most vulnerable to an unwinding of risk seeking positions from investors who have been chasing the dollar carry trade.” Bonds Gain UBS recommends selling the rand and Hungarian forint and is advising that clients maintain “long” positions in the Brazilian real as the south American country has a “more diversified” economy than that of South Africa or Hungary, according to Luo. “We expect the strong performance of the real to continue,” said Luo. A “long” position is a bet an asset will strengthen while a “short” is a wager on depreciation. The real gained 0.3 percent to 1.7749 per dollar by 8:04 a.m. New York time, from 1.7802 at the end of last week, according to data compiled by Bloomberg. Government bonds gained in South Africa, pushing down the yield on the benchmark 13.5 percent security due September 2015 by two basis points to 8.36 percent. The bond’s price, which moves inversely to the yield, gained 9 cents to 123 rand. To contact the reporter on this story: Garth Theunissen in Johannesburg gtheunissen@bloomberg.net

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