Warren,
We don't have cellars here and yes we have to water the foundation. The dirt will pull back away from the foundation on the sides and allow erosion under the foundation which will lead to cracks later in the future getting to be very expensive. The soil is very expansive here and it will crack all throughout the yard, and pull away from the foundation as well.
Here is an example of what Steve mentioned, just not as severe.
Edit:This is not my house, just a picture I found online. I noticed today that I have a small section that is starting to do this, so I need to take care of it before it gets worse. I did not get out to the store today, I have a rodent problem that I started to deal with in my shed. I ended up just opting to call the pest service and they will be out in the morning.