NEW YORK (Reuters) - The US dollar largely took last week off after back-to-back weeks of enormous gains, but its strengthening trend may resume this week as the spreading credit crisis draws more money from overseas.

The dollar, perhaps ironically, has been a prime beneficiary of the recent waves of panic selling of higher-risk assets like stocks, corporate bonds, commodities and emerging market securities. Exactly why is one of the main debates in foreign exchange circles, given that the US arguably is Ground Zero for risk.

Still, most analysts agree a main driver is that investors are scaling back on their risk profiles and leverage levels. That has resulted in US-based investors bringing cash home and overseas investors looking for the safest hiding place, often opting for short-dated Treasury bills as their local markets convulse even more wildly than US markets.

"The dollar will generally remain bid against most of the G10 currencies as risk aversion continues to be the key driver for equities and FX markets globally," said Dustin Reid, head of FX strategy at RBS Global Banking & Markets in Chicago.

As strains in the credit markets finally shows signs of easing following unprecedented actions by governments around the world, investors are shifting their focus to the impact on the real economy from the meltdown.

"People are preparing for a global recession in 2009...and a US recession possibly for the second half of this year," Reid said.

The US is already in what could be its longest recession in decades, while the world's other richest nations are also in or close to recession, a Reuters polls of economists showed this week.

Moreover, there is still a considerable amount of uncertainty about the credit markets. Interbank lending rates fell on Friday, with notable declines in short-term rates, but longer-term funding remains scarce.

"The outlook for US and the global economy is for much weaker data for the next three to six months — numbers that clearly indicate a recession," said Paresh Upadhyaya, a portfolio manager for Putnam Investment Management in Boston, with total assets managed of $50 billion.

Overall for next week, "the currencies will take their cues from the equity market and the general appetite for the risk," he added. "Right now, the attitude is to look to reduce any outstanding risk positions."

The dollar has gained about five percent against the euro since the beginning of October, after a more than 10 percent advance in the previous quarter.

The ICE Futures US dollar index, which tracks the value of the greenback against a basket of currencies, rose 9.6 percent in the third quarter and another 3.8 percent so far in October.

As fears of a global economic downturn intensify, there remains an enormous pool of capital that may flow back into the US, boding well indeed for the US dollar, said currency strategists at Citigroup.

"US investors purchased nearly $1 trillion in foreign stocks and bonds since the beginning of 2003. There are signs that this outflow is reversing, but 'repatriation' in July and August stood at a paltry $60 billion," the firm wrote in a research note.

"Fear has been associated with USD strength. Since there remains significant scope to 'repatriate' foreign investments, it is likely to continue to support USD in the short term."