(FORTUNE Magazine) – When will the cheap dollar be too cheap? As the leaders of the seven major industrial nations gathered in Tokyo for the economic summit, the greenback stood at its postwar low against the yen and at a five-year low against the West German mark. American economists worried that the slide would frighten off foreign investors -- especially the Japanese -- who have fueled a historic U.S. bond rally. Most were awaiting an upcoming auction of $27 billion in Treasury bonds, the biggest ever, to see if foreigners are still buying. ''For many, the dollar has come down too far too fast,'' says Jonathan Francis, head of currency forecasting at Wharton Econometrics. ''The markets are searching for a signal that it is about to bottom out.''

The Reagan Administration is unlikely to oblige. Said Treasury Secretary James Baker: ''We think the decline of the dollar has been orderly and moderate.'' The only official voice of concern came from Federal Reserve Chairman Paul Volcker, who continued to express fears of renewed inflation. The dollar may be nearing bottom. Says Francis: ''We are projecting it to be up just a bit a year from now, from a low of about 167 yen to about 175.'' By then, currency rates might just replace terrorism as the main item on the next summit's agenda. Meantime, betting is that Japanese investors will continue buying U.S. bonds. Over the long run they have outperformed Japanese bonds.

CHART: TEXT NOT AVAILABLE Down, down, down Will the greenback's slide drive foreigners out of U.S. markets?