Tepid Fed auction, short-covering boost dollar

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.

SHORT-COVERING BOOSTS DOLLAR

"It's just a little bit of short-covering, more than anything else. The strength of the dollar last week did not last for long and it's setting the stage for a run up to 1.59 on euro/dollar," said David Gilmore, partner at FX Analytics in Essex, Connecticut.

The dollar briefly rose above 100 yen shortly after the announcement of the TSLF auction results. It was last trading at 99.77 yen, up 0.8 percent on the day. Against the Swiss franc, the dollar gained 0.6 percent 0.9944.

Analysts said reports showing the U.S. economy grew in line with market expectations in the fourth quarter, while jobless claims declined last week, had minimal impact on the market.

"We did see some strength in the U.S. dollar, but I would not read too much into that," said Matthew Strauss, senior currency strategist at RBC Capital Markets in Toronto.

"We gained 200 points overnight on euro/dollar and are seeing profit-taking after that upward move. The bearish dollar sentiment remains."

In its final estimate of fourth-quarter gross domestic product, the Commerce Department said economic growth slowed to an annual pace of 0.6 percent from a robust 4.9 percent in the previous three months. The number was unchanged from the government's previous estimate.

Thursday's data also showed the number of U.S. workers filing new claims for jobless benefits fell by 9,000 last week, although a more reliable gauge of lay-off trends rose to its highest in more than two years.

"It's really consolidation of yesterday's losses for the dollar as the market continues to reprice a 50 basis points easing at the Fed's meeting next month," said IDEAglobal's Powell.

The Federal Reserve has slashed the benchmark federal funds rate to 2.25 percent from 5.25 percent just over six months ago, while the European Central Bank has kept its refinancing rate at 4 percent.

(Additional reporting by Gertrude Chavez-Dreyfuss; Editing by Dan Grebler)