NOW THAT the dollar is falling, how far down is it going to go? There's no reliable way to forecast it, for the process is hard to control and the foreign exchange market has a notorious tendency to overshoot. As long as the Reagan administration declines to interfere, the dollar's exchange rate will be set by the number of dollars that foreigners want to buy. The fall can feed on itself. If investors think that a currency will keep dropping, they are unlikely to want to buy much of it -- and their predictions will then become self-fulfilling. Under those circumstances, the dollar could fall a long way.

To which many economists will say: good. That's the conventional way to end a trade deficit, and the gigantic American trade deficit needs to be ended. America's foreign debts are piling up much too fast for safety. But there's a little more to it than that.

The Congressional Budget Office brought out a study last week showing that the trade deficit is on a rising trend, and of all the standard prescriptions, only two would actually reduce it: a recession and a falling dollar. A typical medium-sized recession, lasting half a year, would have only a very modest and short-lived effect. Devaluing the dollar would be far more effective. But here again, the CBO's model showed, the relief is temporary. If there's no other and deeper change in the economy, even depreciating the currency brings only transient relief.

Recent British experience makes that point clearly. Beginning in 1967, Britain repeatedly turned to devaluation of the pound to try to get its economy moving faster. But as the pound fell, growth sputtered and unemployment rose. Letting the pound fall turned out to be no automatic ticket to prosperity. Nor, incidentally, does a rising currency necessarily choke off growth. The pound has been rising steadily against the dollar for nearly three years, and the growth rate in Britain has been rising as well.

For six years the Reagan administration has pushed American incomes artificially high by running the large budget deficits that produced, in turn, large trade deficits. But the lenders are beginning to cut off the loans that made it all possible. Incomes are going to have to come down, either by taxation or by inflation. Productivity and quality of output have to rise. To rely solely on devaluation to deal with the trade balance will generate inflation here, weaken the country's credit abroad and pass the basic repair job on to the next president.