If you think the U.S. dollar has suffered in foreign exchange markets, take a moment to consider the plight of your friends and neighbors in Canada.

The beleagured Canadian dollar last week briefly fell below 85 cents in U.S. funds, but managed a small recovery to finish at 82.25 cents, down from 85.33 cents a week earlier.

The latest drop was caused by threats from the Arab Monetary Fund to boycott Canadian banks and securities. The threat followed an anouncement by Prime Minister Joe Clark that Canada plans to move its embassy in Israel to Jerusalem from Tel Aviv.

The government has backed off a bit, saying the move will not be made at this time, but some members of the Arab community are clearly upset with Canada.

The Canadian dollar took a severe beating early this month as it got a double blast of bad news.It fell more than a cent in value in just two days as the government reported dismal merchandise trade figures and revealed that it had to spend more than $1 billion in May to shore up the sagging currency.

The sad performance of Canadian currency is seen in some quarters as an important factor in the defeat of the local government in last month's federal election.

Because the Canadian and U.S. units are called dollars, there is an element of national pride in the respective value of the currencies. When Canadian currency is at a discount to U.S. funds, it suggests the world has issued an inferior report card to Canada. National pride blooms when its currency is strong.

There have been semiserious suggestions that Canada should shift to metric maple leaves or beavers from the dollar.

As recently as 1976, the U.S. dollar was trading at about 97 cents in Canadian funds. A tourist coming north found the cost of a Canadian dollar was $1.03 in U.S. funds.

But the election of the separatist Parti Quebecois in the Quebec provisional election late in 1976 was followed quickly by a precipitous drop in the value of Canada's currency.

Investors universally dislike uncertainty, and the prospect that Canada might be split up, however remote, focused their attention on the country and its prospects.

And what they saw was disturbing - double-digit inflation, soaring wages and production costs, a host of strikes in the public and private sectors, growing government deficits and a perennial overall deficit on current account.

So Canada's economic situation hadn't worsened appreciably, but investors were more critical when they took a second look.

The surplus that Canada rolls up on merchandise trade is always less than the combined cost of servicing obligations to investors abroad and the cost of foreign travel by Canadians.

Add the political uncertainty and the currency could go only one way - straight down. In the following two years, the dollar fell by 20 percent against U.S. funds, reaching a low early this year of 83.20 cents U.S...

That level is the lowest for the currency since 1933.

The drop through 1978 and early this year raised the cost of the U.S. dollar in Canadian funds to more than $1.20. And this happened while the U. s currency was taking a beating against other major currencies.

At its low, the Canadian dollar sank by more than 40 percent against the Japanese yen and the Swiss franc, by almost 40 percent against the West German mark and by about 30 percent against the French franc and the British pound.

Canada has employed two devices to strengthen the currency or at least keep it trading in an orderly fashion. Canadian interest rates have been pushed to record highs in order to attract funds from abroad, and the government also has borrowed heavily in U.S., Swiss, Japanese and other currencies to shore up its dollar.

But in the early months of this year, a change took place. The turmoil in Iran caused international investors to look for secure sources of oil and gas.

As they refocused on Canada, there was a growing consensus that the country would fare well in the future. Whatever the politics, radical change that would interrupt the supply of Canadian oil was seen as highly unlikely.

With Canada the only western industrialized nation with a good chance of gaining energy self-sufficiency in the next five to 10 years, its deeply discounted dollar began to look like a bargain.

Suddenly, there was a swift upward pressure as foreign interests began to buy the currency. Instead of using foreign reserves to bolster a weak currency, Canadian authorities had to sell Canadian funds to keep their dollar from moving up through the roof.

Ottawa revealed that by the beginning of May, it had paid back $1.9 billion of the $5 billion borrowed to support the Canadian dollar during 1978. The currency was moving up toward 88 cents U.S., and things looked bright.

There were continuing announcements of oil and gas finds in Canada's western and arctic regions. Pipelines to carry this energy would bring an inflow of funds to Canada, and the situation could only improve.

Canadian exporters were operating with the competitive advantage of a devalued currency, and the trade surplus on merchandise might even exceed the record of $3.52 billion set in 1978.

But those merchandise trade figures were troubling some currency traders. The figures usually are issued about 30 days after a month ends and are subject to revision.

The revisions usually were reductions in previously announced merchandise trade surpluses. Former finance minister Jean Chretien suggested that Statistics Canada might want to take a bit longer before issuing figures and perhaps get them right the first time.

The merchandise surplus in the first four months of 1978 was $1.5 billion. The surplus in the first four months this year is less than $500 million, a drop of more than $1 billion. The March figures were disappointing, only a $150 million surplus.

The April figures were issued showing a slim $12 million merchandise surplus. Worse, the March figures were revised to show a $1.6 million deficit.

The figures stunned currency traders, and the dollar fell half a cent in minutes. Then Ottawa admitted spending more than $1 billion in May to steady the dollar. Despite this intervention, the currency fell 2 cents during the month.

High interest rates have been a key weapon in defending the currency. Canada's bank rate - the equivalent of the U.S. Federal Reserve rate - is currently at a record 11.25 percent. There were seven rounds of rate increases last year.

With a million unemployed and an 8 percent unemployment rate, raising the spectrum of interest rates further means more unemployment, slower economic growth and more inflation. The political reality is that rates cannot rise much higher.

Some observers say the Canadian dollar could reach 79 U.S. cents in 1979 but this seems to be the wildest pessimism. During the recent federal election campaign, the victorious Progressive Conservative Party said it would like to see the dollar in the 88-cent to 92-cent range. No one in government is talking about how this could be accomplished.

Currency controls have been ruled out. Canada can't hope to attract foreign capital if controls are seen as inhibiting the free removal of funds.

Canada's trade picture is not all bad: a record grain sale to China and a big sale to Japan helped early this year. What has been hurting is auto trade, Canada's largest manufactured export. The auto trade deficit rose to $766 million in the first four months of this year from $269 million in the 1978 period.

Canada's economy is tied directly to the economic performance of its largest trading partner, the United States. If the U.S. does well, Canada does well.

Those who believe that the U.S. economy will prosper must believe that Canada will thrive as well. The dollar is currently valued at roughly 85 cents U.S... It could be a bargin. CAPTION: Illustration, no caption, By Geoffrey Moss for The Washington Post