The dollar was trading at $1.4168 against the euro at about 2200 GMT in New York on Wednesday, compared to $1.3974 late on Tuesday.

Immediately after the Moody's announcement, it dropped as low as $1.4216 against the euro, before regaining some ground.

Against the Japanese currency, the dollar fell to 78.98 yen at 2200 GMT, having weakened from 79.27 late on Tuesday.

Right after the Moody's warning, the dollar fell below 0.81 Swiss francs for the first time in history, before climbing back to 0.8176 francs. It was at 0.8303 a day earlier.

"Rating agencies have been annoyingly aggressive lately and their actions have caused widespread volatility in the financial markets," said Kathy Lien, director of currency research at GFT.

Moody's issued the warning because of rising prospects that the US debt limit will not be raised in time to avoid default.

The action came as US President Barack Obama and Democratic lawmakers and their Republican counterparts held a fourth straight day of talks to try to hammer out an agreement on a deficit-reduction budget.

Republicans are refusing to lift the country's $14.29 trillion debt ceiling without deep government spending cuts, and they reject Democrats' demand that tax increases must be part of any sweeping deficit reduction plan.

The dollar also fell against the British pound, trading for $1.6164 against the pound at around 2200 GMT on Wednesday, compared to $1.5913 late on Tuesday.

Copyright AFP (Agence France-Presse), 2011