NEW YORK, Jan 21 (Reuters) - The dollar fell for a third straight session on Thursday, with investors seeking out higher-yielding currencies, as a slew of better-than-expected U.S. data and continued optimism about a massive stimulus package spurred hopes of a recovery in the world's largest economy.

The euro, on the other hand, gained versus an overall weak dollar, even as European Central Bank President Christine Lagarde warned about a renewed surge in COVID-19 infections and the prospect of prolonged restrictions that could challenge the region's economic outlook.

The ECB, which kept interest rates steady on Thursday, also pledged to provide more support for the economy if needed.

The FX market showed little reaction to Lagarde's comments, as market participants continued to focus on what seemed like an improving global economic outlook and a nearly $2 trillion U.S stimulus package proposed by new Democratic President Joe Biden's administration.

On Thursday, U.S. data showed an economy slowly getting some traction, with slightly better-than-expected initial jobless claims, upbeat housing starts data, and a higher factory index for the mid-Atlantic region.

"Across asset markets, optimism about growth is high and I think it's appropriate," said Anujeet Sareen, global fixed income portfolio manager at Brandywine Global Investment Management in Philadelphia.

"We see the dollar going lower because global growth will get better, the trade balance is deteriorating, and the Federal Reserve is going to keep its easy monetary policy," he added.

The dollar typically loses out against its major peers in times of global expansions, when investors are inclined to take on more risk.

In afternoon trading, the dollar index fell 0.2% to 90.19, after touching a nearly one-month high of 90.956 on Monday.

The euro gained 0.5% against the dollar to $1.2159 , rising as well versus the yen to 125.89 yen .

The greenback also dropped versus currencies tied to commodity prices such as the Australian , Canadian and New Zealand dollars .

The Norwegian crown rose 0.5% against the dollar to 8.4185 after Norway's central bank struck a hawkish tone on Thursday, saying it expects to raise rates early next year as the economy recovers from the coronavirus pandemic.

Sterling likewise set a fresh 2-1/2-year high against the dollar and a new eight-month peak against the euro on hopes Britain's brisk pace of COVID-19 vaccinations would lead to a relatively quicker rebound in economic growth.

Many analysts expect the dollar to continue its downtrend, which saw it lose nearly 7% in 2020.

That said, Wells Fargo's Nelson thinks the dollar is due for a reversal from its current weak trend in the coming weeks.

"There is an underappreciation of how difficult it would be for Biden to come in and have another $2 to $3 trillion out there in spending approved," Nelson said.

In the cryptocurrency market, bitcoin slumped nearly 11% to $31,757, retreating further from record highs, with traders citing fears of tighter U.S. regulation.

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Currency bid prices at 1:58PM (1858 GMT)

Description RIC Last U.S. Close Pct Change YTD Pct High Bid Low Bid

Previous Change

Session

Dollar index 90.1620 90.4100 -0.27% +0.00% +90.4540 +90.0430

Euro/Dollar $1.2155 $1.2106 +0.41% -0.51% +$1.2174 +$1.2106

Dollar/Yen 103.5300 103.5500 +0.00% +0.25% +103.6600 +103.3500

Euro/Yen 125.85 125.33 +0.41% -0.84% +125.9600 +125.3300

Dollar/Swiss 0.8857 0.8898 -0.46% +0.12% +0.8899 +0.8849

Sterling/Dollar $1.3711 $1.3660 +0.38% +0.37% +$1.3745 +$1.3656

Dollar/Canadian 1.2632 1.2635 +0.00% -0.78% +1.2646 +1.2591

Aussie/Dollar $0.7754 $0.7747 +0.09% +0.80% +$0.7782 +$0.7742

Euro/Swiss 1.0766 1.0768 -0.02% -0.38% +1.0786 +1.0757

Euro/Sterling 0.8864 0.8864 +0.00% -0.82% +0.8872 +0.8831

NZ $0.7190 $0.7170 +0.28% +0.13% +$0.7222 +$0.7173

Dollar/Dollar

Dollar/Norway 8.4195 8.4900 -0.48% -1.60% +8.4865 +8.4010

Euro/Norway 10.2360 10.2810 -0.44% -2.21% +10.2920 +10.2138

Dollar/Sweden 8.2915 8.3383 -0.25% +1.16% +8.3530 +8.2651

Euro/Sweden 10.0810 10.1065 -0.25% +0.04% +10.1115 +10.0570

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(Reporting by Gertrude Chavez-Dreyfuss; Editing by Jonathan Oatis and Hugh Lawson)

((gertrude.chavez@thomsonreuters.com; 646-301-4122; Reuters Messaging: rm://gertrude.chavez.reuters.com@reuters.net))