Improving economic conditions in the US, coupled with remarks made by Ben Bernanke, the Federal Reserve Chairman, have stoked expectations that monthly $85 billion Quantitative Easing programme could be coming to an end.
Emerging market currencies have been particularly hard hit by this news. The Indian Rupee, for example, hit an all-time low against the dollar in June.
Policymakers across the emerging world have reacted promptly: in Brazil, the government has abolished a tax on foreign bond investments to encourage capital inflows and Indonesia, the central bank has increased its benchmark rate by 25 basis points to support its currency.
So is this the end of cheap money?
Not quite. The Fed has consistently said that interest rates will not be raised if unemployment is above 6.5%, provided inflation remains under control. At its current pace the unemployment target is unlikely to be reached until early 2015; and inflation in the US remains low and stable.
But it does look like the Fed is at the beginning of a path back towards operating normal monetary policy that could take as long as five years.
Mark Carney is taking over the Governorship of the Bank of England at an interesting time. Based on recent events, the new governor’s priority should be to develop and communicate an exit strategy, or else, he runs the risk of market pressures forcing his hand.