The dollar continues to slide steadily downward in the world's foreign exchange markets.

So far, so good. The dollar was grossly overvalued, causing the gigantic American trade deficits of the past several years. But a sinking currency is not necessarily and endlessly a good thing. As the dollar declines, the country's standard of living declines. To rely on devaluation alone to balance the American trade accounts would be wildly dangerous.

This long descent of the dollar, which began more than a year ago, is approaching the point at which further depreciation can no longer be justified. It is not yet quite time to hit the brake, but it is certainly time to start looking for the brake and seeing that it is in working order.

A year ago the dollar was overvalued by 40 percent, in terms of the things it actually bought. That was an insupportable burden for American exports and an unbeatable subsidy for imports. Currently it's only about 10 percent overvalued against other currencies, according to one close observer, John Williamson of the Institute for International Economics.

The United States is now trying to restore its competitiveness in foreign trade. There are two ways to do it -- to push down the dollar's exchange rate or to push up the national economy's productivity. A falling dollar is more easily arranged in the short run, but it becomes costly and damaging over the years. It means that imports cost more and salaries buy less, which in turn threatens inflation. Trying to bring trade into balance solely by manipulating exchange rates is not only perilous but inefficient, for many traded goods are not very sensitive to price. The most visible examples currently are the expensive cars coming in from Europe. Once they have established their sales networks and won a share of the market, dislodging them becomes very difficult and takes an extraordinary swing in exchange rates.

The other way to improve competitiveness is to lift the productivity of the people who are the economy. That's the only way to increase the standard of living -- except to borrow abroad, as this country has been doing on a massive scale for the past three years. Unlike borrowing binges, productivity gains provide a solid base for higher incomes. Unfortunately, in this country, the growth of productivity slowed sharply in the late 1970s and has been zero for the past two years. No one knows precisely why.

It would be easy, in frustration, to abandon the hunt for productivity and instead push the exchange rate farther and farther down. But prosperity doesn't lie down that road. The stabilization of the dollar has become the most immediately urgent of the subjects waiting for President Reagan and his six friends, the week after next, at their Tokyo summit meeting.