Swiss franc nears record vs. dollar on Libya unrest

NEW YORK (Reuters) - The Swiss franc edged toward a record high on Wednesday as turmoil in Libya drove investors to seek safety, while the U.S. dollar fell broadly as the greenback appeared to lose its safe-haven luster.

The euro, which for sometime was treated as a risk currency, rose as investors seeking safety shunned the dollar. Expectations that interest rates will rise faster in the euro zone than in the United States helped boost the single currency.

Stocks markets fell worldwide after political violence in Libya sent U.S. oil futures to $100 a barrel, fanning concern about inflation and its impact on the global economy.

"The theme is basically dollar selling on fears that (the unrest) in Libya could expand," said Brian Dolan, chief currency strategist at Forex.com in Bedminster, New Jersey. "The dollar at the moment is not enjoying any kind of safe-haven respite."

Against a basket of currencies, the dollar .DXY was down 0.5 percent at 77.383, after falling as low as 77.255, a near three-week trough.

The euro hit a session peak of $1.3787 on trading platform EBS, with gains accelerating after it took out resistance around $1.3745, the February 9 high. It was last up 0.7 percent to $1.3748. The next key upside target lies at $1.3862, the February high, traders said.

Recent hawkish comments on inflation from European Central Bank officials have raised expectations the ECB would hike interest rates before the Federal Reserve.

By contrast, U.S. Fed fund futures have been on the rise since early last week as investors push back the expected timing of the Fed's lifting of interest rates from the current range of zero to 0.25 percent.

DOLLAR NO LONGER SAFE?

Also weighing on sentiment about the dollar, analysts said, were growing worries about the country's ballooning budget deficit.

The federal government will run out of money for non-essential operations if the Democrats and Republicans fail to agree on funding by the end of next week, which could unsettle financial markets and risk mass government layoffs.

"There's increasing concern over the U.S. fiscal situation," said Douglas Borthwick, managing director of Faros Trading LLC in Stamford, Connecticut.

The dollar has "lost its 'flight-to-quality' status," he said. "When there are issues of anxiety in the world, people are now buying the euro rather than buying the dollar."

Borthwick said his firm's latest weekly poll on market positions for macro funds and real money funds showed "significant moves out of the U.S. dollar and into the Swiss franc and euro."

The euro VIX index .EVZ, a measure of the currency's volatility traded on the Chicago Board Options Exchange, earlier reached 11.93 percent, suggesting the expectation of more movements.

Against the Swiss franc, the dollar fell 0.5 percent to 0.9335, after earlier touching 0.9307, the lowest this year and near the all-time low of 0.9301 set in December.

Risk aversion also lifted the yen, although higher oil prices kept a lid on gains, with the Japanese economy vulnerable due to high oil imports. The dollar last traded down 0.3 percent at 82.47 yen.

(Additional reporting by Gertrude Chavez-Dreyfuss; Editing by Diane Craft)