ANALYSIS - No dollar panic yet, but watch for $1.60 in euro

By Gertrude Chavez-Dreyfuss and Wanfeng Zhou

NEW YORK (Reuters) - The death knell for the dollar has been sounded many a time in recent years, but its weakness has still not alarmed investors.

Questions now focus on how much further the dollar can fall before investors flee U.S. assets.

Analysts believe another sharp drop in the dollar or a spike in volatility due to bad news could heighten foreigners' concerns about U.S. assets. That could create a crisis of confidence that fuels calls for rethinking the existing currency regime.

Dollar bears have been worried about the ability of the United States to fund continuing deficits and the detrimental effect of a weak dollar. However, robust equity markets and steady appetite for U.S. Treasuries suggest investors still have faith in U.S. assets.

But there is a tipping point. Analysts point to a move to $1.60 by the euro, the dollar's record against the single currency, as a level that would be the source of alarm.

The dollar has declined 15 percent against a basket of six major currencies from the highs set in March and is down more than 37 percent from a peak in 2001. This week, the greenback was steady with the euro hovering below $1.50, off about 6 percent from the euro's record high at $1.6040 set in July 2008.

"If we breach $1.60. I think that's too far, too fast and could cause concern about a dollar demise," said Michael Woolfolk, BNY Mellon's senior currency strategist in New York.

Low U.S. rates have contributed to the dollar's weakness in recent months as investors use it as a funding currency in carry trades, in which traders borrow in low-yielding currencies and invest in assets with greater returns.