The dollar traded near an eight-month low against a basket of currencies, falling against perceived safe havens like the yen and Swiss franc as a U.S. budget deadlock showed no sign of breaking.
Republican House Speaker John Boehner said on Sunday there was "no way" Republican lawmakers would agree to a measure to raise the debt ceiling unless it includes conditions to rein in deficit spending.
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His comments fuelled concerns that the U.S. Congress and President Barack Obama could fail to reach a deal on raising the ceiling by Oct. 17, when the Treasury has estimated it will have effectively run out of cash.
The political standoff has already led to a partial government shutdown alongside fears that a prolonged stalemate could hurt the fragile economic recovery. This could compel the U.S. Federal Reserve to delay the trimming of its bond-purchases, which is dollar-negative.
The dollar index was down 0.1 percent at 79.997, not far from eight-month low of 79.627 hit on Thursday.
"There is a great deal of uncertainty over the fiscal situation in the U.S. and it looks unlikely to be resolved any time soon," said Lee Hardman, currency economist at BTMU.
"The longer the delay goes on, the greater the potential for the dollar to weaken further, particularly against the yen. Dollar/yen has the greatest downside potential in the near term given that the market is still heavily short the yen."
The greenback was down 0.6 percent against the yen at 96.95 yen, having earlier fallen to a five week low of 96.85 yen. The pair's 200-day moving average at 96.68, is cited as a key support level. Reported large option expiries at 96.50 yen and 96.75 yen would keep the pair close to its current levels.
Osamu Takashima, chief FX strategist at Citigroup Global Market Japan said there was a risk of the pair falling further.
"If the dollar falls to around 95 yen, under-hedged Japanese exporters may try to sell the dollar, further accelerating the dollar's fall."
Although the dollar index struggled to make a significant break above the 80.0 mark, investors have refrained from selling it heavily through a week of political paralysis in Washington, trusting that a last minute resolution would avert a disastrous debt default.
The currency's status as a refuge for investors has also been undermined by expectations that any damage done to the U.S. economy would be countered by the Fed sticking to its stimulus.
Jane Foley, senior currency strategist at Rabobank said that "there is some opinion in the market that the dollar's status as a safe haven will eventually win the day," and added that during past debt ceiling negotiations the dollar had stayed directionless and managed a relief rally once compromises had been met.
"Near-term, we expect the dollar index to retain a downside bias based mainly on the perception that the Fed could decide that delaying tapering of QE is necessary to protect the economy from any negative fallout from the impasse."
The dollar also lost 0.5 percent against the Swiss franc to 0.9028 francs, slipping towards a 19-month low of 0.89675 francs set on Thursday.
The euro edged up 0.2 percent and was last at $1.3577 , not far from Thursday's eight-month high of $1.36465 against the broadly weak dollar.