Since March, the U.S. dollar has been sliding from its peak values against other key currencies, the British pound has soared 33 percent, the West German mark about 18 percent and the Japanese yen almost 10 percent.

By the end of the week, the British pound, which had been as low as $1.05, was cruising above $1.40; the German mark had climbed from under 30 cents to 35 cents; and the yen, which had been over 260 to the dollar, was in the vicinity of 238 to the dollar.

The Reagan administration would welcome a further depreciation of the dollar (provided that it doesn't come in a sharp downward burst) because it might counteract protectionist pressures on Capitol Hill. Much of America's $123 billion trade deficit of last year is blamed on the overvalued dollar. In turn, that is a consequence of the huge budget deficit.

Treasury Secretary James A. Baker III said in a Washington Post interview: "We're not displeased with the recent decline of the dollar." But mindful of the troubles experienced by some of his predecessors who were accused of "talking the dollar down," Baker was careful not to set any lower target for the dollar. Other administration officials have said privately they'd welcome an overall 20 to 25 percent decline.

There are pluses and minuses to a weaker dollar: When the dollar is cheaper, it is a welcome development for American manufacturers because it helps exports and slows down the flood of imports.

A slide in the dollar -- if it should continue -- has negative implications, too: Imports would be more costly, causing new inflationary pressures for consumers. In addition, as Federal Reserve Board Chairman Paul A. Volcker has been pointing out in congressional testimony, a cheaper dollar also provides less incentive for foreigners to buy Treasury bills and notes, meaning that an important source of financing the federal budget deficit is thereby threatened.

But it is necessary to keep the recent dollar decline in perspective: It has retreated only about 13 percent since March, a small amount compared with the 74 percent increase in its value on a trade-weighted basis from the third quarter of 1980 to the first quarter of 1985.

Thus, it would take a much more substantial decline in the dollar before there would be beneficial effects on the trade deficit or negative effects on inflation. And therein lies a dilemma for government officials and the Federal Reserve.

A "precipitous" decline in the dollar "is the greatest risk we have on the inflation front," Volcker told a House Banking subcommittee. He pointed out that, if the Fed allows the dollar to get too low and foreign investors pull their funds out of the United States, interest rates would have to rise sharply to attract enough domestic money to cover the budget deficit.

Thus, Fed policy at the moment appears to be giving priority to keeping a heavy inflow of capital to help finance the deficit.

Volcker, through the haze of his cigar smoke and sometimes obscure rhetorical flourishes, is trying to tell the markets that he doesn't want to risk a dramatic decline in the dollar by pursuing lower interest rates -- even though lower rates would be welcome news for a sluggish economy. Yet, he promised the Fed will still follow a monetary policy generous enough to fuel what it hopes will be an improving growth rate for the economy in the second half of this year.

The Reagan administration needs to see a 5 percent real growth in the economy in the second half to make good on its new, lowered forecast of 3 percent growth for the year as a whole. There is probably no way for the economy to grow that fast in the final six months this year without an accommodating Fed monetary policy.

Thus, the Fed decision is the equivalent of a high-wire balancing act, and no one is sure the central bank can bring it off. If Volcker can do it, "It would be a feat rarely -- if ever -- accomplished," says Henry Kaufman of Salomon Bros.

So far, despite the plunge in interest rates this year -- the six-month Treasury bill rate dropped to 7.25 percent from 10.5 percent before picking up slightly after Volcker's testimony -- the United States remains attractive to most foreign investors because of its "safe haven" aspect.

The Fed had been hoping that the president and Congress would get together on a budget-reduction package that would allow the central bank room to maneuver on monetary policy without risking serious new inflation.

The administration was counting on a deficit-reduction package of about $50 billion this year and $300 billion over the next four years. But prospects for that have been jolted by political realities on the Hill: Neither Republicans nor Democrats have the stomach for making the tough decisions (on raising taxes and cutting nondefense spending) that are crucial to a meaningful deficit-reducing exercise.

In addition to the concern over the budget and trade deficits, there is a new question mark relating to President Reagan's health. The markets were momentarily shaken by news of his cancer, then recovered with his quick response after surgery. But the medical assessment that about half of those afflicted with colon cancer die of the disease is a sobering thought.

"New uncertainties about the president's health will erode confidence and weaken the Reagan dollar over time," said Pierre Rinfret, president of the consulting firm of the same name. "We think it's an entirely new ball game, changed totally for the bad, and we reverse all our prior positions," Rinfret said.

Another uncertainty relates to the future course of the Fed itself. Two governors known as "sound money" men and Volcker supporters will be leaving the Fed this year and next: Lyle Gramley, who has announced his retirement, and Charles Partee, whose term expires next year, and who isn't expected to be renamed by Reagan. Theoretically, Volcker could find himself in a minority on the seven-person board.

Financial markets worry that Volcker might quit in such a situation. "That may be only a minor factor at the moment," said Kaufman, "but it's certainly there in the background."