FORCED TO CHOOSE between higher interest rates and a lower dollar, the Reagan administration has now explicitly decided to let the dollar keep falling. To defend itself, the administration observes that interest rates high enough to stabilize the dollar would probably cause an immediate recession. But continued devaluation will exact other costs, although the present strategy may postpone them. The administration is now understandably anxious to get through the next 14 months without any large economic disruptions that, by hitting jobs and incomes, will demonstrate to voters the danger into which the country has drifted. What's happening is that the rest of the world has got uneasy about financing the United States' enormous deficits and is no longer sending its money here to invest as it did throughout the early 1980s.

At best the price of more devaluation will be rising inflation and a gradually lowered standard of living. But there are other possibilities. An American policy of deliberate devaluation, with no end in sight, may persuade foreign investors that for the present they had better keep their money in other currencies. If they do that, interest rates in this country will go up regardless of anything the Federal Reserve Board can do. Americans do not save enough to finance both the federal deficit and the normal needs of industrial growth. They have become very comfortably accustomed to depending on European and Japanese savings. Without them, the risk of recession will sharply rise.

The dollar has been falling for some time, but at this point the foreign reaction is likely to become less accommodating. By early 1985 it had become greatly overvalued in terms of the things -- cars, television sets, foodstuffs -- that it could buy. It fell for two years, most of that time under international agreement, and by early this year was at roughly its true parity with other major currencies in actual purchasing power. Now the administration is going to let it become substantially undervalued. It won't be easy to get international agreement on that. The last time that this country let the dollar get undervalued was in 1978-80, and it ended badly for both the economy and the president then in power.

The fundamental danger isn't interest rates or exchange rates. It's American overconsumption. Under six years of this administration's policies, the country has got into the habit of living high on borrowed money. Now the lenders are rebelling; the trouble with exchange rates is only the symptom. For the White House, the question is how to shield consumers and voters from this unwelcome reality a little longer.