The dollar dropped on Thursday after Federal Reserve Chairman Ben Bernanke told a congressional committee that more interest rate cuts may be necessary and that the economic outlook has worsened.

In testimony before the House of Representatives' Budget Committee, the Fed chief echoed a bleak assessment of the economy's health he delivered last week, widely seen as a signal that the U.S. central bank would slash rates by a hefty half-percentage point at month's end.

Bernanke's comments are obviously bearish for the dollar, said Greg Salvaggio, senior vice president of capital markets at Tempus Consulting in Washington. He mentioned 'substantive action' once again. That certainly puts 75 basis points of easing from Federal Reserve back on the table.

The euro was up 0.2 percent to 1.4685. The dollar fell 0.4 percent against the yen to 107.08.

Separately, a survey showed factory activity in the U.S. Mid-Atlantic region contracted dramatically in January, reinforcing fears of recession.

The Philadelphia Federal Reserve Bank said its business activity index took a huge dive to minus 20.9 in January from minus 1.6 in December. Economists polled by Reuters had forecast a slight uptick to minus 1.0.

Any reading below zero indicates contraction in the region's manufacturing sector.

It just confirms what we all think that the U.S. economy is rapidly spiraling toward recession, said Tempus Consulting's Salvaggio.

(Reporting by Nick Olivari and Gertude Chavez-Dreyfuss; Editing by Jonathan Oatis)