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* Dollar gains as investors seek "safer" assets
* Markets unimpressed by U.S. package agreement, bank plan
The dollar climbed on Thursday, attracting safe-haven bids on concerns about weakness in stock markets around the world and the effectiveness of U.S. government policies in combating recession.
Lower risk appetite also fueled strong demand for government debt, another safe-haven destination. Data showing a surprise rebound in U.S. retail sales and lower jobless claims did little to ease the anxiety, which added to losses on the high yielding currencies such as the Australian and New Zealand dollars.
"The contrast between high- and low-yielders is re-established in favor of lower yielders as markets lose faith in the U.S. stimulus package being passed before Friday, while still no fresh details emerging from the financial rescue plan," said Ashraf Laidi, chief market strategist at CMC Markets in London in a note to clients.
In mid-afternoon trading, the euro traded at $1.2807, down 0.7 percent after an earlier plunge to $1.2723 , its lowest since Feb. 2.
The dollar rose 0.1 percent to 90.51 yen , while the euro lost 0.6 percent to 115.99.
The dollar and yen tend to benefit when investors are nervous about the state of the global economy and are inclined to sell riskier assets such as stocks and commodities funded by the two currencies.
But the volatile environment left investor sentiment focused on the latest piece of economic or government news, causing sharp fluctuations in price.
DISENCHANTED INVESTORS
Overall, investors remained disenchanted with the U.S. government's efforts to stimulate the economy, its measures seen as falling short of the market's very high expectations.
"Many investors perceive the banking bailout package and the stimulus spending bill (as) poorly designed and too little," said Andrew Wilkinson, senior market analyst, at Interactive Brokers in Greenwich, Connecticut.
"This risk aversion theme is not entirely the path we had expected the dollar to take, yet the potential for global fallout means that the prospects for the dollar are more, rather than less, positive."
Market anxiety lingered even though U.S. congressional negotiators reached a deal on Wednesday on $789 billion in emergency spending and tax cuts aimed at pulling the economy out of a deepening recession. For details, see [ID:nN11379390]
The Dow Jones industrials .DJI fell 2 percent, as losses on Wall Street mirrored declines in bourses worldwide on concerns about the ability of Washington to rescue banks and spark an economic recovery.
The Bank of England's quarterly inflation report on Wednesday, when it said it is ready to take unconventional policy easing steps, continued to keep sterling under pressure. The pound was down 0.8 percent at $1.4263 .
In other currencies, the Australian dollar fell 1.1 percent to US$0.6484 , while the New Zealand dollar was down 1.1 percent at US$0.5193 .
The Australian dollar was hurt after the Australian Senate just blocked passage of the Labor government's A$42 bln stimulus bill. This is only likely to delay passage not kill it entirely but stimulus payments to households will slip from March toward May, perhaps adding to case for another sizable rate cut in March.
"This disappointment offset a positive surprise from the January employment report which showed the economy added 1,200 jobs during the month," said Vassili Serebriakov, currency strategist, Wells Fargo Bank in a research note.
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