Until recently, the Reagan administration insisted that the dollar was not overvalued, but merely reflected the markets' judgment that the U.S. economy was strong and the best place in the world for investment of money (thanks to Reaganomics, of course). What's more, Ronald Reagan and his advisers believed in letting the markets call the shots.

Americans are ambivalent on this issue: An overvalued dollar makes it cheap to travel abroad or buy foreign goods. But the dark side of an overvalued dollar is that it translates into high prices for American goods, with a loss of U.S. jobs to competitors abroad.

It has taken a long time for the negative side to sink in, but there has been a 180-degree turn in the Reagan administration's policy on the dollar. Today, Treasury Secretary James A. Baker III -- who, in effect, is Reagan's chief economic adviser -- believes that the markets' evaluation of the dollar has been wrong. Baker, supported by Federal Reserve Board Chairman Paul A. Volcker, not only has taken steps to bring the dollar down, but also wants to see it reduced further.

It became clear last week that the administration's more aggressive dollar policy is still evolving.

The first, and key, step in this major turnabout was a meeting called by Baker with finance ministers from four other leading powers -- West Germany, Japan, France and Great Britain -- in New York on Sept. 22 at the Plaza Hotel. There, it was agreed that they would work together to devalue the dollar, while revaluing the yen, the mark and other currencies when "to do so would be helpful."

Since this Group of Five finance ministers meeting, the exchange value of the dollar has dropped about 8 percent on a trade-weighted basis and now is about 22 percent below its February peak, according to Stephen H. Axilrod of the Federal Reserve System staff.

The G-5 meeting, which included Volcker and the other central bankers, was timed perfectly: The dollar already had started to weaken, and the U.S. economy was more sluggish than had been expected. Thus, intervention to cause a further drop in the dollar, accompanied by lower interest rates here, would serve American domestic, as well as international, interests.

The practical, political motivation behind the new administration policy was clear enough.

Edward G. Jefferson, chairman of the board of E. I. du Pont de Nemours & Co., put it graphically when he said that American manufacturers' annual profit margins on exports were more than offset by losses traceable to appreciation of the dollar. Jefferson said that, at its February peak, the dollar was up 65 percent against the currencies of the countries where Du Pont does business. With emphasis, Reagan's business supporters got this message across to the White House.

Even with the dip that followed the G-5 meeting, the dollar still is up about 40 percent over the 1980 base. "We need a decline of another 20 percent to 25 percent before we can compete," Jefferson said.

Baker's G-5 initiative was a de facto abandonment of the hands-off, unmanaged floating-exchange-rate system, which allowed private speculators in the foreign exchange markets an undue say on what the dollar would be worth in other currencies at any given time.

But what became clear this past week at a bipartisan "summit" on the dollar called by two congressional reformers -- Rep. Jack Kemp (R-N.Y.) and Sen. Bill Bradley (D-N.J.) -- is that Baker's rejection of a do-nothing policy on the dollar may go beyond mere willingness to intervene in the foreign exchange markets.

Deputy Treasury Secretary Richard Darman, the chief architect at the Treasury of the G-5 strategy, suggested that the administration is seeking further, more substantive changes in the international monetary system that would devalue the dollar more and then keep exchange rates on a more stable path. But Baker and Darman are moving cautiously. Darman warned: "We can't move the international monetary system faster than the ability of the political system to adapt to it."

What Darman means is that it is one thing to hope -- as businessmen such as Patterson hope -- not just that the dollar will come down, but that the wide fluctuations in value that have characterized the floating-rate system in recent years will be avoided as well. But it is difficult to achieve. To get to a more reasonable currency relationship, and then expect it to hold, something more basic than mere intervention, G-5 style, is necessary. What Darman has in mind is action to reduce the huge U.S. budget deficit; to expand the domestic Japanese economy; and to cure the disease known as Eurosclerosis, which assures long-term unemployment in Europe. And these things aren't going to happen overnight.

Darman may have breathed some new life into a halfway house toward fixed rates: "target zones," in which nations would agree to keep their currencies within a narrow band of permissible fluctuations. Darman acknowledged a growing interest in target zones, as proposed once more on behalf of French President Francois Mitterrand by his aide, Jacques Attali, and endorsed -- with variations -- by New York banker Robert Roosa and economist John Williamson of the Institute for International Economics.

Target zones might have some "virtues" as a "middle ground" between floating and fixed rates, Darman said. But he quickly noted the "weakness" of such a system: the lack of assurance that the agreed-upon zones would be linked "with a policy for dealing with the fundamentals."

The West Germans and Japanese, who worry about giving up some of their national autonomy, vigorously oppose target zones. And many American experts believe that flexible rates, with all their faults, still are to be preferred to target zones or other fixed-rate schemes. Within the Reagan administration, there still are strong defenders of the floating-rate system, including one of its originators, Secretary of State George P. Shultz.

Thus, the big question is what kind of consensus Baker and Darman can promote among the G-5 partners on the fundamental changes in their domestic economies that would be needed to produce more stable exchange rates. The U.S. has yet to deliver on its G-5 commitment to cut the budget deficit, and the others haven't moved decisively, as they promised, to expand their economies.

"The G-5 includes finance ministers with varying degrees of ability to deliver within their own systems," Darman admitted. "And at the political level, we don't have the necessary machinery: The closest thing we have are the economic summits, which are good for personal relationships and symbolism, but their substantative contribution seems to be to reproduce the previous year's communique' with the date changed."

The G-5 meeting at the Plaza, Darman acknowledged in summary, "was a crude attempt to make the link between monetary change and political realities , and it may be the best we can do."

The Kemp-Bradley summit, of course, was groping for something more concrete. At the end of two days of intense discussion, there was a sense that the two politicians with presidential ambitions had at least captured a magic moment for keeping the dialogue going, especially by winning Baker's and Darman's participation.

As British Labor Party leader Shirley Williams said, "There is a need for creative ideas as an answer to protectionism." With somewhat different motivations, Kemp and Bradley, along with Mitterrand, want a "Bretton Woods Conference II" to set up a new monetary system (which for Kemp and Mitterrand, but not necessarily for Bradley, would be based on gold).

So far, the administration publicly opposes convening a formal new Bretton Woods conference or playing around with gold. Baker and Darman, as pragmatic politicians, aren't going to set up a conference at which a new monetary system will be negotiated; any conference they're involved in would be one to ratify a deal already made.

Edward M. Bernstein, a survivor of the original Bretton Woods conference, noted that the 1944 confab (one of the few such events that ever was rated a success) was proceeded by 30 months of careful planning by the Treasury and negotiations with other countries.

As MIT Professor Charles Kindleberger shrewdly observed: "It is a mistake, I think, to have a meeting of international bodies before we have a meeting of international minds."