It's a known issue. It won't work because the mouse in the guest is an absolute pointing device, and that prevents applications in the guest from changing the mouse cursor position.
You can modify your .vmx file (make sure that the VM is powered-off and closed first) and add the lines:
vmmouse.present = "FALSE"
mouse.vusb.absDisabled = "TRUE"
but note that if you do this, you'll lose the ability to automatically grab/ungrab when your mouse moves in/out of the VM window.