NEW YORK | Mon Jul 25, 2011 9:54am EDT

(Reuters) – The dollar fell to a record low against the Swiss franc and a four-month trough versus the yen on Monday as a deadlock in negotiations to raise the U.S. debt ceiling spooked the market and spurred demand for currencies viewed as safe havens.

Analysts warned of further sharp selling in the dollar if Washington fails to increase the U.S. debt limit and enters a technical default on its debt next month, a scenario for which analysts have priced in a roughly 10 percent chance.

Overall, the Swiss franc was the biggest beneficiary of the demand for safe havens, pushing the dollar to an all-time low of 0.80210 franc on trading platform EBS. The dollar has fallen in three of the last four sessions against the Swiss currency.

The euro also fell versus the franc, dropping 1.8 percent, as did sterling. Traders reported heavy selling of the pound ahead of Tuesday’s UK gross domestic product data for the second quarter, which could show a contraction instead of market expectations for a 0.2 percent rise.

Most investors expect a deal will be done before the August 2 deadline to avert a U.S. default, but the lack of progress in talks over how to cut the budget deficit and the possibility of a ratings downgrade of U.S. debt weighed on risk sentiment, which analysts said would dog the dollar.

“The budget impasse and the general bickering of politicians in the U.S. in deciding what their stance would be on the debt ceiling is weighing on dollar sentiment,” said Ravi Bharadwaj, market analyst at Travelex Global Business Payments in Washington.

He added that Moody’s further slashing of Greece’s debt rating on Monday did not benefit the dollar much as a safe haven alternative to the euro, but instead boosted the Swiss franc and gold.

The U.S. Treasury said it will run out of money to pay the country’s bills after August 2, though some analysts say the Treasury may be able to scrape some money together to get by for a week or two, which some market players believe cannot be ruled out.

Against the yen, the dollar fell as low as 78.055 yen, its weakest level since mid-March, and was last at 78.202 yen, down 0.4 percent.

Many traders say the dollar could test a record low of 76.25 yen if concerns about the U.S. debt ceiling worsen, while they also expect the U.S. currency will keep plumbing all-time troughs versus the Swiss franc.

“It’s likely the U.S. will stitch up some sort of deal to avoid a technical default next week, but it could drag on until the last moment,” said Adam Cole, global head of foreign exchange trading at RBC.

“If it does drag on, the only clear-cut conclusion you can draw is that dollar/yen goes down, and dollar/Swiss goes down, and we’re seeing a miniature version of that today.”

The ICE Futures’ dollar index .DXY slipped 0.06 percent to 74.156 versus a currency basket, near 73.889, a six-week low hit last week.

The euro was little changed against the dollar at $1.43640, as the euro zone’s lingering fiscal crisis kept traders wary over the single currency.

The euro initially slipped against the dollar after Moody’s downgraded Greece by three notches to Ca from Caa1, though the impact was limited because the move was not a surprise and traders were focused on the U.S. debt saga.

Original source