Perpetual motion machines are justifiably objects of derision. They violate the principles of thermodynamics and, like so many politicians, promise something for nothing.

The currency carry trade, which involves borrowing a low-yielding currency, selling it, and then lending a high-yielding currency, should fall into this free-lunch category. The second currency’s higher interest rate both props up that currency and signals that the currency is at risk of a substantial decline. Thus, when the trade is unwound by selling the high-yield currency, it will command fewer units of the lowyield currency borrowed originally.

However, this is not what was hinted at by the long-term simulated performance tables of the ABN-Amro currency trading style indices shown last month ("Why currency traders should be humbler," Currency Trader, May 2007).