* U.S. debt default looms as lawmakers remain divided
* Dollar hits record low versus Swiss franc
* U.S. stocks fall in light volume (Updates with stock market close)
By Wanfeng Zhou
NEW YORK, July 26 (Reuters) - The U.S. dollar fell broadly on Tuesday as U.S. lawmakers remained deadlocked over raising the nation's debt ceiling to avoid a devastating default, while U.S. and European shares also declined.
Unless lawmakers reach a deal to raise the $14.3 trillion ceiling by Aug. 2, the United States faces the prospect of a default on some of its $9.6 trillion bonds outstanding.
President Barack Obama, in a televised address Monday night, warned that this would be a "reckless and irresponsible outcome," but he gave no indication that a compromise was imminent. For details, see [ID:nN1E76N0CA]
Weakness in the greenback helped buoy crude oil prices, while gold hovered near a record high above $1,600 an ounce as investors sought the precious metal for safety.
The U.S. currency hit a record low against the Swiss franc
of 0.7997 franc
"The market is getting more nervous about the debt ceiling issue," said You-Na Park, currency strategist at Commerzbank in Frankfurt. "If the market was really starting to price in the possibility of a default, the dollar would be losing more than what we saw."
Against a basket of currencies, the dollar <.DXY> fell 0.7
percent. The euro rose 0.9 percent to $1.4508
The debt gridlock in Washington also hit U.S. stocks. The
Dow, the biggest loser, suffered additional pressure from
disappointment over quarterly earnings from 3M
The Dow Jones industrial average <.DJI> ended down 91.50 points, or 0.73 percent, at 12,501.30. The Standard & Poor's 500 Index <.SPX> lost 5.49 points, or 0.41 percent, at 1,331.94. The Nasdaq Composite Index <.IXIC> was down 2.84 points, or 0.10 percent, at 2,839.96.
Just 6.46 billion shares changed hands in composite trading, another lower-than-average day of activity.
"Investors are just kind of sitting on the sidelines," said King Lip, chief investment officer at Baker Avenue Asset Management in San Francisco. "No one wants to be short and no one wants to be long."
European stocks closed down 0.3 percent at 1,100.97 points <.FTEU3>. World stocks as measured by MSCI world equity index <.MIWD00000PUS> rose 0.3 percent, while emerging stocks <.MSCIEF> gained 0.7 percent.
Investors so far appear to have done little to prepare for a default or a cut in the U.S. AAA credit rating. Many are still clinging to the hope that lawmakers will eventually reach a deal.
It is also nearly impossible to insure against what is considered a low-probability event, especially given the lack of alternatives and the depth of the market, analysts said.
The cost of insuring the United States against default
stood around 60.8 basis points
The CDS curve is nearly flat with one-year CDS
The United States will lose its top-notch credit rating from at least one major rating agency, according to a Reuters poll. [ID:nN1E76P12Q]
TREASURY AUCTION
Treasuries prices rose as a decline in the U.S. stock
market renewed a safe-haven bid. The benchmark 10-year note
Fears the government will soon run out of cash fueled anxiety about appetite for this week's $99 billion of new debt supply even after Tuesday's sale of $35 billion of two-year notes attracted relatively solid demand.
"We have a lot of uncertainties with these auctions with what's happening in Washington. People are hesitant to take on risk," said Thomas Roth, executive director in U.S. government bond trading at Mitsubishi UFJ Securities USA in New York.
Safe-haven Bund futures
In commodities trading, U.S. crude