FOREX-Euro inches up vs dollar as Dow hits record; Aussie boosted

* Dow's record high, economic data boost risk sentiment

* Investors still wary of ECB, Italy's political situation

* Yen strengthens after BoJ confirmation hearings

NEW YORK, March 5 (Reuters) - The euro rose for a second straight day against the dollar on Tuesday while commodity currencies such as the Australian and New Zealand dollars gained as risk sentiment improved after a major U.S. stock index surged to all-time highs. The Dow Jones industrial average hit a record, blowing past lifetime peaks last seen in October 2007, when the world was heading toward the financial crisis. "The dollar is still a function of risk sentiment. So when you see the stock market rise, tangentially, that means a lower dollar and stronger foreign currencies," said Tatjana Michel, director of currency analysis at Charles Schwab in San Francisco. Investors tend to buy riskier currencies such as the euro and Australian dollar in times of increased appetite for risk. Greg Moore, currency strategist, at TD Securities in Toronto pointed out, however, that the Dow's impact on the currency market was not as strong as many had expected, adding that he doesn't expect risk sentiment to continue driving currencies. "We have moved away from that risk dynamic a few weeks ago and I still think domestic developments would continue to drive currencies going forward." Further lifting the mood in financial markets was a report showing the pace of growth in the vast U.S. services sector last month accelerated to its fastest rate in a year, helped by a pick-up in new orders and demand for exports. 1/8ID:nL1N0BWC1Y) The euro was last up 0.1 percent at $1.3047, near the day's high of $1.3075. The Australian and New Zealand dollars were also higher, up 0.5 percent and 0.4 percent against the greenback to US$1.0249 and US$0.8309, respectively. The euro earlier climbed to a session high after a euro zone composite PMI survey came in at 47.9, marginally better than the preliminary reading of 47.3. Euro zone retail sales data also beat expectations and provided a slight boost to the euro zone common currency. The euro zone PMI remained well below the 50 mark dividing growth from contraction, however, and dipped from the previous month. Early gains were capped as investors weighed the chances the European Central Bank will cut interest rates this week. And as the currency bloc's economy continues to falter despite Tuesday's data, there is the possibility the ECB will ease policy in the coming months if not this week. "Whether the ECB cuts rates this Thursday will depend on its inflation outlook. We have seen a preliminary figure of 1.8 percent which is below the 2 percent level and that gives the ECB some window to ease," said Schwab's Michel. "I personally think the ECB will wait for its inflation and growth forecasts which it will publish a week later. I believe the ECB will take this into account if it does decide to ease in April." The euro has also been hurt by political concerns in Italy. Last week's election left no group with a working majority in parliament and that meant Italy could be inching closer towards another election within months. Valentin Marinov, head of European G10 FX strategy at Citi in London, said investor uncertainty about Italy could escalate if there is no government in place before the end of the month, adding he expected the euro to target $1.28.

YEN RISES The yen was up against the dollar after confirmation hearings of the government's nominees for two Bank of Japan deputy governor posts, which had been widely expected by the market. Analysts said the dollar's early drop against the yen was mostly a reflection of market positioning as traders were probably long dollar/yen going into Tuesday's confirmation hearings. The Japanese government has signaled it wants the BoJ to pursue aggressive monetary easing to stimulate the economy, a stance that has weighed heavily on the yen since November. The dollar was down 0.2 percent at 93.30 yen, falling for a second straight day. Some strategists, however, said the dollar's uptrend against the yen remained intact and dips would provide a good chance to buy the pair. "Overall, we continue to view near-term pull-backs into the 91.80 yen area as providing buying opportunities," analysts at Morgan Stanley said in a note.