* Dollar reverses gains against Swiss franc, hits record low
* U.S. expected to pass debt deal to avert default
* But risk of ratings downgrade ignites more dollar selling
* Dollar up vs yen, but hovers not far from 4-mth low
By Jessica Mortimer
LONDON, Aug 1 (Reuters) - The dollar hit a record low against the safe-haven Swiss franc on Monday, reversing earlier gains on investor concerns that a deal to raise the U.S. borrowing limit would not be enough to avoid a downgrade to the country's triple-A credit rating.
After weeks of discord, U.S. lawmakers looked likely to pass a deal to raise the debt ceiling, avoiding a default, and cut about $2.4 trillion from the deficit over the next decade, prompting many in the market to unwind bearish bets on the dollar taken out in recent weeks.
However, investors resumed dollar selling on concerns that ratings agencies may consider the planned deficit cuts would not be sufficient for the United States to improve its fiscal position.
"The debt ceiling deal needed to be done, so this is not a cause for rejoicing and it is not a win situation for the dollar as there is still a good chance of a ratings downgrade," said Steve Barrow, head of G10 currency research at Standard Bank.
After tepid second quarter U.S. growth figures on Friday, concerns about the economic outlook also weighed on dollar sentiment.
The dollar fell 0.5 percent versus the Swiss franc to 0.78153 francs on EBS trading platform, well below last week's record low just above 0.7850 francs.
Traders cited selling by real money accounts, which pushed it well off the day's high around 0.7954 francs, as well as selling by a U.S. investment bank.
Broad demand for the Swiss currency also pushed the euro to a fresh record low of 1.12628 on EBS.
Against the yen, the dollar traded 0.2 percent higher at 76.88 yen, well below an earlier high of 78.05 yen and very close to a four-month low of 76.70 yen hit last week. A move below there would leave it poised to test its all-time trough of 76.25 yen.
Further yen appreciation would keep investors wary that Japanese authorities -- which have argued against a rising currency -- may take action to curb yen strength.
The prospect of a deal to avoid a U.S. default helped appetite for risk, however, prodding the euro up 0.1 percent against the dollar to $1.4412.
The growth-linked Australian dollar rose 0.6 percent on the day to $1.1053, close to a multi-year high of $1.1081, while the New Zealand dollar hovered close to a 30-year high hit in Asian trade.
'UNDERWEIGHT DOLLARS'
Despite the mild rally in the dollar versus safe-haven currencies, traders pointed out that the greenback's recovery had been relatively limited given that it fell nearly 7 percent versus the franc and 3.5 percent against the yen last month.
The latest IMM data shows net short positions in the dollar held by speculators jumped last week, to a value of $25.42 billion according to Reuters calculations. Analysts said this was the biggest net short position since early May.
Some traders said that, if anything, the market was positioned for the possibility of a U.S. downgrade.
Thanos Papasavvas, head of currency management at Investec Asset Management, said he remained underweight on the dollar as the United States will continue to struggle to get its fiscal situation in order as the economy posts a slow recovery.
"Even if this plan goes through, it won't change things much," said Papasavvas, who is responsible for around $10 billion in assets under management.
"(Because of) the structural story, the cyclical story, and the reserves story, we have a pretty negative outlook on the dollar," he said, adding he saw a "decent" possibility that Washington would lose its triple-A status.
He said he remained overweight euros and Asian and emerging currencies, and that he had largely stayed pat on currency positions in the past weeks.
Demand for risky assets was dampened by sluggish manufacturing purchasing managers' surveys for many euro zone countries on Monday, which highlighted economic weakness in the region as struggling periphery countries require more assistance to help repay their debts.
Some traders said Spain's surprise announcement on Friday that it would call an early general election ratcheted up political uncertainty in the euro zone, which may ultimately have some impact on how much more bailout funds countries including Greece may receive. (Additional reporting by Naomi Tajitsu)