"Hot money is one of the biggest challenges facing the central banking fraternity. It breaks the link between policy rates and the broader economy. Money flows in from abroad, leaving the banking system awash with liquidity. Inevitably, the money is lent out. The more hot money there is, the greater the likelihood the money chases the wrong kinds of investments. Australia, New Zealand and, Iceland face similar challenges.
.......As hot money pours into an economy, the central bank typically feels rather pleased with itself. The currency tends to strengthen, seemingly a vote of confidence in the central bank's own abilities. Moreover, a stronger currency leads to lower import prices and, hence, lower inflation. For an economy, hot money is like a dangerous narcotic: it creates a high, a moment of euphoria. Its disappearance leaves only devastation in its wake. "