WHILE THE continuing decline of the dollar's exchange rate isn't an immediate threat, neither is it a sign of strength or good health. The cost of a falling exchange rate is higher inflation generated by the rising prices of imports -- and inflation is already uncomfortably high. The benefit is an increase in exports as they become cheaper abroad, and American exports have in fact been rising. But, contrary to the textbook models, so have imports. The dollar has been dropping for five years, and the trade deficit is hardly lower now than it was then. It doesn't look as though a lower dollar is going to bring American trade into balance.

But the United States isn't doing much to stabilize the dollar. The Bush administration is much more interested in getting interest rates down, and it can't do both. Exchange rates are driven, at least in the short run, by interest. If a government wants to control one of them, it has to let go of the other. Interest rates in this country are already lower than in most financial centers abroad, making the dollar less attractive to investors than the yen, mark or pound. That's why it's falling.

In Britain, the government has now made the opposite choice. Prime Minister Margaret Thatcher has committed the pound to the mechanism that ties the European Community's currencies together. Her government clearly hopes that this link to the German mark will help bring down the British inflation rate, the highest in any major industrial country.

Mrs. Thatcher had resisted a fixed exchange rate ever since she came to power 11 years ago on grounds that it would constrain her domestic policies and her radical strategy to invigorate the British economy. She has now sacrificed some of that freedom of action in this sudden reversal, and it will be highly interesting to see whether cooperation doesn't serve her country better.

The United States meanwhile is left to contemplate a dollar that keeps sliding gently but steadily downward. Does that have to continue forever? There's a way out, even without jacking up the interest rates. For the past decade, this country has depended on a heavy flow of capital from abroad to keep the country running prosperously. Instead, it could reorganize its affairs to make itself an exporter of capital. It's the countries that are lenders, not the borrowers, that have strong and stable currencies. That's not the only reason for increasing taxes and balancing the federal budget -- but it's far from the worst reason.