THE BANKS' prime lending rate has come down another notch while, once again, the dollar's exchange rate has risen. As usual the change in the prime rate attracts a great deal of attention while the rise of the dollar does not. Americans traditionally ignore the possibility that foreigners, and foreign exchange rates, might affect their own prosperity. But there's a connection between those two movements, falling interest and a rising dollar.
The connection lies in the flow of foreign money now coming into this country, most conspicuously from Europe. Foreign investors push up the exchange rate by buying dollars, then push down the interest rates by buying securities here. The important point here is that the process is reversible.
The administration is now encouraging the assumption that the dollar is stable, and will stay at that high exchange rate indefinitely. In fact, it will stay there only as long as that inflow of foreign money continues. How long will that be? No one can say. It's no more predictable than any other speculative wave.
But there are plenty of visible signals suggesting a need for caution ahead. For example, Salomon Brothers, the international investment banking firm, recently took a brief poll among 161 European investors. Most of them expected the exchange rate to decline within the next six months. Fewer than half intended to increase their holdings of dollar-denominated securities in that time. The poll asked where they now see the most attractive investment opportunities. The British respondents continued to put the United States first. But the continental Europeans ranked Japan first, followed by Europe, followed by the United States. It's a small poll, but it casts a shadow on the easy assumption that the rest of the world is prepared to keep sending its savings here in huge volumes forever.
There are two ways in which this flow of foreign money might end. If the United States continues to coast along in the present style, eventually something will happen to trigger a flight from the dollar. The first effect would be a falling exchange rate. The next would be rising interest rates, as this week's connection swung the other way. Then inflation would begin to rise, because imports cost more. That's a formula for a severe and damaging recession.
The other possibility -- safer and better in every respect -- requires Americans to take the initiative. That means a smaller budget deficit and higher U.S. exports to reduce the need for financing. It would be difficult to accomplish, but it's consistent with steady economic growth and high employment. There's a choice here for American policy and the people who make it. But currently the choice is being ignored.