A Dagger is a type of short sword created with:
One Hand Grip
You create it by heating the Ingot and putting on the anvil. Hold down 'Z' while looking at the Anvil and select 'Blades' from the Radial Menu. Hit the heated ingot until it turns into a short blade. To change the design just hit it until you are happy with the design then dip the blade in the oil and bring it to the workbench to connect to the grip.