The falling value of the United States dollar on foreign exchange markets has created a new concern among some economists: that the ''virtuous economic circle'' of the last two years will turn into a ''vicious circle'' of renewed inflation and stagnation.
''That worries me,'' says Robert D. Hormats, former assistant secretary of state for economic and business affairs.
In the past few years, the strengthening of the dollar against foreign currencies has restrained inflation here by making imports cheaper. A 10 percent rise in the dollar, it is calculated, knocks abount 1.5 percent off the US inflation rate.
Considering the rise in the strength of the dollar, that has made an important difference in inflation. A trade-weighted index of six major foreign currencies, compiled by Irving Trust Company, shows the dollar rising from around 100 in 1980 to an average of 134 last year and a peak of 146 on Oct. 18, and back down to 140 by last Friday.
That means, in effect, the stronger dollar knocked some 6 percent off inflation since President Reagan took office.
In turn, that better inflation rate, combined with interest rates much higher than those abroad, makes the dollar extremely attractive as an investment medium. Thus foreigners invest more in the US, again pushing up the price of the dollar.
Now, Dr. Hormats and other economists see a danger of that pattern being reversed. Speaking of the drop in the dollar last week, the vice-president of the Wall Street investment banking firm of Goldman Sachs & Co. commented: ''It is hard to know whether this is the start of a sharp devaluation in the value of the dollar or whether it will level off.''
When the dollar falls in value, the price of imports will rise, stepping up the pace of inflation. The dollar will also become a less attractive vehicle for investment. There could be an outflow of money from the US, further weakening the dollar.
''I don't think anyone would like to see a big panic plunge in the dollar,'' says Christa Bleyleben, a foreign exchange trader at the Bank of Boston. ''It would not be to anyone's benefit.''
The conclusion of three events should clarify the dollar trend, Mrs. Bleyleben says. These are the US election, a key monetary-policy meeting in Washington today, and the testimony of West German Chancellor Helmut Kohl regarding a campaign finance scandal, also today.
Hormats says he reckons that about $85 billion in foreign capital has moved into the US this year. Around $30 billion of this is sunk into such assets as real estate and stocks. The remaining $55 billion is invested in very liquid assets, such as short-term Treasury bills or commercial bank deposits. This money could move out quickly if the dollar shows signs of depreciating and investors lose confidence, he says. Americans could also invest billions more abroad if they see the prospect of a weakening dollar adding to their investment return.
''The market psychology could turn around,'' Hormats notes.
Such a shift could be triggered, he suggests, by a decline in real interest rates or higher inflation. Foreigners may become convinced the dollar ''is not as stable an asset as before.''
Besides boosting inflation, Hormats says, the outflow of capital could boost interest rates.
''This could lead to stagflation such as we had in the past,'' he speculates.
Hormats admits that people have been predicting a major plunge in the value of the dollar for two years now. But he assumes that ''at some point'' the dollar will decline substantially.
Such an event, he continues, will put the Federal Reserve System in ''a quandry'': It will have to decide whether to loosen monetary policy to try to keep the economy going and keep interest rates down, or whether to tighten up to fight inflation. ''The Federal Reserve System, in this circumstance, will have a very difficult situation before them.''
As in any market, opinions differ.
Lawrence L. Kreicher, an economist who follows foreign exchange trends for Irving Trust of New York, says the dollar, as measured by his bank's trade-weighted index, will fall six points from its current 140 level between now and spring before appreciating steadily to 160 by the end of 1985.
He says he is counting on the massive US balance-of-payments deficit to increase from about $107 billion this year to $125 billion next year. The US, he argues, will have to attract foreign capital to finance this deficit. So interest rates will climb, and the market psychology will turn around and attract foreign investors.
Other economists pay more attention to ''fundamentals'' than psychology. For example, Charles Lieberman of Shearson Lehman/American Express Inc., figures the foreign appetite for dollars could become sated, precipitating a crash in the dollar, higher interest rates, a weak stock market, and a rise in inflation.
He notes that the US is adding foreign debts each year at a rate approaching the total outstanding foreign debts of either Brazil or Mexico.
''Like the domestic Treasury budget deficit to which it is related, the current account deficit is pouring IOUs onto the market at a pace that ensures turmoil at some point,'' he says. ''Unless it is addressed soon, it will greatly disrupt the world's financial system.''
Sometime in the first half of 1985, he figures, the US will become a net debtor, and end up the year $75 billion in the hole. Its assets overseas (US investments in plant and equipment as well as paper assets) will be exceeded by its debts to foreigners (their investments in American plant and equipment and paper assets). At the current pace, he adds, the US will become the world's largest debtor by the end of 1986.
Mr. Lieberman says he believes the US must slash the federal deficit to bring down domestic interest rates and make the dollar less attractive for foreigners. This will correct the value of the dollar, eventually discouraging imports and encouraging exports.
Consulting economist Robert H. Parks says he sees a pattern for the dollar similar to that seen by Mr. Kreicher - first down, then up for part of the second half of 1985. But then he forecasts ''recession No. 9'' in the postwar years, and a collapse in the dollar.
''We have economic heaven right now,'' he says. But he adds that heavy military spending, huge budget deficits, and heavy private credit demands will prompt the Fed to squeeze the boom.
Pierre Rinfret, another consulting economist, expects the dollar to flex its muscle even harder before long. He sees the possibility of it buying 3.25 marks (it was 2.92775 early Tuesday) before the end of the year. That's because he reckons the US economy is ''the only game in town'' - the only vigorous economy in the industrial world outside of perhaps Canada and Autralia.
''I would be afraid to short the dollar,'' he concludes.
Hormats says he would like to see the Treasury show a greater willingness to intervene in the foreign exchange markets to keep dollar rates within ''reasonable bounds.'' He says the exchange markets are often erratic, and that the dollar is currently ''way overvalued.'' At the moment, the Treasury says it will intervene only when the foreign exchange markets are disorderly.
Hormats recalls arguing with Treasury officials about the need to intervene on one occasion when the foreign exchange market was excited. The Treasury finally agreed to step in. But when Treasury Secretary Donald T. Regan was called about it after the market closed, he said he had intervened with $50 million - peanuts in terms of that market.
''No one (at the Treasury) takes intervention seriously,'' he concludes. He charges the Treasury with ''a rather cavalier attitude'' to foreign exchange rates.
Hormats admits that floating rates - where buying and selling by business determines currency prices - are far better than fixed rates set by governments. ''But they are not perfect,'' he said during a recent lecture to the Fletcher School of Law and Diplomacy here.