Like Pavlov's dog, which would salivate at the sound of a bell, U.S. stock market investors will these days launch into a buying frenzy at the faintest hint of more monetary stimulus.

But if Federal Reserve officials' assurances of continued support for the U.S. recovery have released feel-good endorphins among wishful thinkers on Wall Street, their subtle admissions that a third round of "quantitative easing," or QE3, isn't off the table may equally have sent emerging market central bankers into a cold sweat.

Financial authorities in developing countries fear their economies will be in the line of fire if U.S. economic conditions deteriorate so much that the Fed again starts buying bonds to anchor U.S. interest rates. They know from experience that many of the dollars the Fed injects into the financial system would flow offshore and into their currencies, whose higher yields are more attractive to investors. This "hot money" would push up their exchange rates to the detriment of their exporters and leave their capital markets vulnerable to volatile turns in sentiment.

If these policy makers were to respond to QE3 as many did to QE2 by buying dollars in the foreign exchange market, cutting interest rates or otherwise quelling exchange rate appreciation--they would revive what Brazilian Finance Minister Guido Mantega alarmingly described in 2010 as a "currency war." With their export leaders complaining of a loss of competitiveness, central bankers would come under immense political pressure to protect vital industries and to go soft on inflation, often a byproduct of a weaker currency. And this time, global conditions are such that their actions could set off a self-perpetuating cycle of competing devaluations that does considerable damage to the world trading system.

Unlike in 2010, China's economy is now slowing. Meanwhile, Europe is in an austerity-led recession and the modestly improved U.S. economy faces a major test when steep fiscal cuts take effect at year-end. QE3 could easily land in a world of weakening global demand, which means exporters from places like South Korea, Turkey, Brazil and South Africa would be fighting over a shrinking pie. The temptation to fight lost competitiveness with market intervention rather than by curtailing domestic costs would be great.

Making matters worse, investors now have fewer alternatives as currency bets. They won't want to chase the euro higher, not amid the ever-present threat of a debt meltdown in Spain. There is no upside in the Swiss franc, now anchored by a minimum CHF1.20 price that the Swiss National Bank is vowing to pay for euros. And ever since the 2010 currency war, many governments--most notably Brazil's--are taxing foreign capital and using other measures to curtail hot money inflows.

Money will seek the path of the least resistance. So currencies of emerging market and commodity producers with a less interventionist exchange regime--Australia's or Mexico's, for example--could bear the brunt. The result would be a matrix of grossly distorted exchange rates and heightened international tension, all of which could ultimately encourage trade sanctions.

China's actions will be key. In the past, the People' Bank of China (3988.HK)'s interventions to prevent the yuan from rising too rapidly exacerbated the Fed-induced currency war. China's closed capital account and tight management of exchange rates kept the yuan off limits for speculators, steering them into smaller nations' currencies. Now, after widening the band within which the yuan can freely trade, Chinese authorities have hinted at more flexibility. Yet the international praise they earned for this currency "liberalization" could prove premature. Beijing can still fix the midpoint of the newly widened trading range and may well choose to hold it in place. China's currency remains too tightly controlled to be the safety valve the world needs.

Jim Rickards, author of the recently published "Currency Wars," believes we are in a phase not unlike two previous cycles of beggar-they-neighbor competitive devaluations: that which spanned the 1920s and 30s, and the 1970s. It is up to the Fed, he says, to avoid a disastrous rerun by reaffirming the strength of the dollar and disavowing more quantitative easing.

We can expect a similar buck-stops-with-the-Fed narrative when finance ministers and central bank governors from the BRICS countries of Brazil, Russia, India, China and South Africa meet on the sidelines of this week's meetings of the International Monetary Fund in Washington. But Chairman Ben Bernanke and his colleague at the Fed have tended to dismiss the currency war rhetoric and argue instead that the problem lies with emerging market central banks paying too little attention to inflation and too much to exchange rates.

All this will be moot, of course, if the U.S. economy continues to add jobs and the Fed takes no further action. For the sake of global stability, the whole world should pray that's the case.