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Steven,

This appears to be a bug in CCE v3. If you take a look at the linker build step, it has the --output_file option which is the location that you specified for the output file followed by the -o option which was added by the build step by default, which defaults to \Debug or \Release directory. The later option is taken into effect, hence the output file always ends up in \Debug or \Release instead of the user specified location. This is addressed in the next release of the toolset, Code Composer Studio v4.

To work around this in CCE v3, you can change the command line by doing the following:
Right-click on the Project, select Properties->C/C++ Build->MSP430 Librarian

Change the command line from:
${command} ${flags} ${output_flag} ${output} ${inputs}

to:

${command} ${output_flag} ${output} ${flags} ${inputs}

The idea is that the --output_file option should appear after the -o option in the build

Also, I just wanted to mention that the creation of a library project will be different in the next release CCS v4 compared to CCE v3. In CCE v3, if you select Project Type as Library, then the source files are compiled and then linked as a relocatable module. In CCS v4, the source files will be compiled, and then the object files will be archived into a object library (using the Archiver), which actually fits better with the definition of a library. So the --output_file option will really not even be available for the librarian. More details on the archiver can be found in the MSP430 Assembly Language Tools Users Guide,
http://www-s.ti.com/sc/techlit/slau131