PARIS -- Seen from abroad, the most important story coming off Capitol Hill this week may not have involved Oliver North or John Poindexter. The disclosure by the Congressional Budget Office of new projections showing the federal deficit rising to $198 billion in 1989 also caused big ripples across the Atlantic.

The Financial Times of London gave its account of the CBO's revised projection the lead position on its front page. Since most U.S. newspapers did not give the story such treatment, why does it attract this attention in Europe?

Here this new projection looks like a body blow to the monetary strategy that Treasury Secretary James A. Baker III has been pursuing for the past six months. Baker has been skillfully buying time, waiting for the expected improvement in the trade and budget deficits to blunt protectionist pressures at home.

The sense of the deficits turning around was also supposed to encourage Japan and West Germany to take increasingly larger steps to lead international growth and help out the U.S. economy.

Baker had relied heavily on the CBO's original prediction that the deficit would come down to $161 billion by 1989. Throughout the spring and early summer, he assured the Europeans and Japanese that the United States was making significant progress in curbing its financial profligacy. Cutting $40 billion out of the deficit, he said in conferences in Paris and Venice, was nothing to sneeze at.

Moreover, he committed the United States to deficit reductions of that magnitude as part of the Louvre monetary agreement of last February. West Germany and Japan demanded that as the price for their agreement to stimulate their economies.

But the CBO's new deficit number, based on lower than expected tax revenue, higher inflation and rising interest rates for 1989, leaves Baker without a paddle for the policy canoe he had chosen, as America's economic partners ponder continuing to cooperate with the United States under the Louvre agreement.

The CBO projection and figures showing the trade deficit for May widening again led financial markets to mark the dollar down Wednesday, ending a brief period of dollar stability.

It is enough to make some European bankers cite that American folk hero, Yogi Berra, and ask if we are seeing deja vu all over again. They recall the summer of 1979, when a new U.S. Federal Reserve chairman had to face a precipitous decline in the dollar as his first crisis.

Under the strong urging of West Germany's Karl Otto Poehl and other central bankers, Paul Volcker responded by forcing the Carter administration to accept monetarism in the form of high interest rates as its central policy mechanism. He saved the dollar, tamed inflation and destroyed Carter's chances in the 1980 election.

Volcker's recent resignation may offer some insights into the challenge that his successor at the Fed, Alan Greenspan, could face if we are in fact heading back to the future this summer.

It seems clear that Volcker would have stayed for a third term only if President Reagan had made a strong personal request -- the kind that would have included a firm pledge to back measures as draconian as the ones Volcker used eight years ago.

Did Volcker foresee that significant new interest rate hikes and other squeezes would be needed in the domestic economy as time ran out on Baker's dollar strategy? Obviously, he isn't saying. But he could not have relished the prospect of fighting with the economy and with a White House running an election campaign at the same time.

Baker's close relationship with Vice President Bush presents him with a challenge as daunting as Greenspan's. Baker must begin now to fuse his macroeconomic mandate at the Treasury with his micropolitical mission of helping Bush get the nomination and win the general election.

Nothing is more vital to Bush's chances than having the economy appear to be humming smoothly in the first nine months of next year. He can then appeal to voters to let an experienced Republican team continue to manage a Republican-inspired economic expansion.

As in 1979, the strength of the dollar and the weakness of the world economy will have a strong impact on the domestic economic choices facing the country. Volcker showed wisdom in acknowledging that simple truth then. Greenspan and Baker get their chance this summer, and that is why they will be the two Washingtonians that foreign political and financial leaders are going to be watching most closely for the next few months.