FOREX-Dollar hits record low vs euro for second straight day

(Recasts, updates prices, adds comment)

NEW YORK, Feb 28 (Reuters) - The dollar fell to a record low against the euro for a second straight day on Thursday as Federal Reserve Chairman Ben Bernanke did nothing in testimony to the U.S. Senate to dispel expectations that U.S. interest rates are headed lower.

The dollar weakened broadly and the key index which measures it against a basket of currencies plunged to a record low for the third straight day.

Federal Reserve Chairman Ben Bernanke on Thursday said that the central bank is in a more difficult position now to respond to a slowing economy than it was in 2001.

Bernanke signalled further rate cuts to avert a recession during his Congressional testimony on Wednesday, making clear that the U.S. central bank was more worried about risks to growth than inflation.

Lower interest rates reduce the attractiveness of dollar-denominated securities and lower demand for the dollars to buy them.

"Bernanke has yet to make a remark that shows open concern about dollar weakness," said Alan Ruskin, chief international strategist at RBS Greenwich Capital in Greenwich, Connecticut in a note to clients. "

Allowing it to drop "is a convenient alternative transmission for the Fed to exert some expansionary influence."

Bernanke said, "We obviously watch the dollar very carefully" but expressed no big concerns about its drop.

Midway through the New York session, the euro was up 0.5 percent at $1.5202 EUR=, near the session high of $1.5206.

The dollar index, which tracks its performance against six major currencies, was down 0.6 percent at 73.733 .DXY, just above a record low of 73.723.

The dollar was down 1 percent against the yen at 105.35 yen JPY= a five-week low.

The euro has surged almost 5 percent in roughly three weeks and investors see plenty of scope for further gains.

"In the current environment, it seems that only a clear worsening of market sentiment and a steep fall in equity markets or surprisingly weak euro zone data could stop momentum in euro/dollar," said Commerzbank in a note to clients.

The dollar has been under pressure since the Fed began cutting rates, pushing benchmark overnight lending rates down by 2.25 percentage points since mid-September to 3 percent, which has made the euro more attractive because the ECB has kept its main rate at 4 percent.

All 15 Wall Street dealers surveyed in a Reuters poll on Wednesday expected a March rate cut and saw the Fed bringing interest rates lower than previously thought. [FED/R]