Countries abandoning the practice of pegging their currencies to the U.S. dollar could become the next source of trouble for the global economy, cautions BMO Capital Markets in a research note.

BMO notes that many emerging countries have, for years, fixed their currencies against the greenback to protect their small, undiversified and U.S.-dependent economies. But these economies are now the engines of global growth as the developed economies struggle, it says.

It it points out that both the Bank of England and the U.S. Federal Reserve Board have commented that inappropriately low interest rates in countries that peg their currencies to the dollar are helping to fuel commodity price inflation.

“Many of the countries in the Middle East and Asia are running double-digit or record-high inflation; but central banks cannot raise interest rates in response as long as they choose dollar pegs to keep their currencies undervalued,” it says.

“The sustainability of the dollar pegs hinges on the U.S. interest rate outlook. If the Fed refrains from raising rates because of economic weakness, despite the rise in inflation, pegs will come under significant further pressure. This is a pressure cooker running over the boiling point,” BMO warns.

“The world may realize that it is no longer reasonable for the dollar to be the anchor currency,” it concludes.

However, BMO warns, “If several dollar-pegged currencies were revalued, we could expect to see some panic selling in the U.S. dollar, further destabilizing the global economy.