I just noticed I had not answered the question in my first post in this thread
Maybe it's best indeed to breach the dam and see what that will do. Maybe the Watcher was dead by the time the Dwarves came to that point in reinstating Moria. Or, perhaps, the Watcher had left the water and went back to the bowels of the earth where it came from. Or, would leave the moment the dam was breached by the Dwarves.