(Reuters) - The dollar tumbled as the Asian trading session got underway after Moody's warned the United States may lose its top-notch credit rating if lawmakers fail to increase the country's debt ceiling.
The dollar was already weak after Federal Reserve chief Ben Bernanke said the Fed could inject more stimulus to the U.S. economy if it weakens further.
The currency fell to a record low against the Swiss franc. The greenback hit a trough of 0.8095 franc, on electronic trading platform EBS.
Moody's Investors Service was the first among the big-three rating agencies to place the United States' Aaa rating on review for a possible downgrade, which means a negative rating action could happen in the next few weeks.
In a statement, Moody's said it sees a "rising possibility that the statutory debt limit will not be raised on a timely basis, leading to a default on U.S. Treasury debt obligations."
"Moody's might be doing this based on the politics as much as the threat of default, because the politics have become so problematic," said Brian Dolan, chief strategist at Forex.com in Bedminster, New Jersey. "Between this and Bernanke talking about QE3, the dollar could be entering a new downward phase."
The euro was last at $1.4188, up 0.2 percent.
The euro held gains even after Fitch earlier downgraded Greece deeper into junk territory, citing the absence of a new and fully funded financing program.
Bernanke "is making it plain that QE3 is still in the Fed's mind and is on the table," said Douglas Borthwick, managing director at Faros Trading in Stamford, Connecticut.
"With a Fed on hold and contemplating more quantitative easing we see euro/dollar rallying and the dollar index dropping through the end of the year," he added.
Bernanke, in testimony before a House of Representatives committee, said: "The possibility remains that the recent economic weakness may prove more persistent than expected and that deflationary risks might re-emerge, implying a need for additional policy support.
The Fed ended its most recent asset-purchase program in June. Traders said another round of easing would flood the financial system with more money and encourage investors to reach for higher-yielding currencies and assets.
While most analysts believed the bar for another round of quantitative easing would be quite high, David Gilmore, a partner at FX Analytics in Essex, Connecticut, said a "Lehman-like event that drives the economy off a cliff" could accelerate the introduction of further monetary accommodation.
The European debt crisis, if it gets out of hand, could be one such event, Gilmore said.
Fitch's remarks on Italy eased worries about the country, whose borrowing costs soared this week on fear that a default in Greece would hurt European banks and strain other countries' finances.
Italy is considered especially vulnerable, as it has the euro zone's second largest debt-to-output ratio.
Still, some analysts said the euro's strength could be quickly cut short. European leaders, set to convene an emergency meeting on Friday, have yet to agree on a second Greek bailout.
The dollar was down 0.2 percent at 78.823 yen, not far from the four-month low touched on EBS in the Wednesday global session.
Traders said markets were also on edge about a pending deadline to lift the debt ceiling.
"We still have not seen the political will in either Europe or the United States to resolve the key issues," BMO's Askari said, which makes positioning tough for currency investors.
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