Tepid Fed auction, short-covering boost dollar

By Lucia Mutikani

NEW YORK (Reuters) - The dollar rose on Thursday, snapping a two-day losing streak, on views liquidity conditions for banks were not as dire as initially thought after a tepid Federal Reserve auction to swap poor-performing investments.

Analysts said the dollar also got a lift from investors covering short positions after a recent sell-off and warned that underlying sentiment on the greenback remained bearish.

Results from the Fed's $75 billion Term Securities Lending Facility, or TSLF, showed primary dealers submitted just $86.1 billion of bids for the Fed's offering of low-risk U.S. government securities for 28 days.

The TSLF is part of a liquidity campaign by the central bank to help the distressed financial sector, which has suffered more than $120 billion in write-downs tied to subprime mortgage investments.

"It's a sign that banks aren't desperate for liquidity, so the dollar got a boost out of that ... the thought of the banks' liquidity conditions being better than originally thought," said David Powell, currency strategist at IDEAglobal in New York.

But details of discount window borrowing for the week ending Wednesday showed primary dealers more than doubled their direct borrowing from the Fed.

In late New York trade, the euro was down 0.5 percent on the day at $1.5766, a bit more than 1 cent below last week's record highs above $1.59. But the euro was still up more than 8 percent this quarter, remaining on track for its strongest quarterly performance since late 2004.

Analysts said investors were merely pausing before driving the euro to fresh all-time highs against the dollar, with U.S. economic data continuing to point to further Federal Reserve interest rate cuts.