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I think they do this to perform the canine equivalent of a pillow plumping.
Excellent point and one I had overlooked. I'll certainly add that to my answer bank!
Great answer chris, but I suspect it may also have something to do with them scanning the 360 degree area surrounding them and identifying any possible threats before their anticipated relaxation.
Also, the circle they make is typically tight. This is consistent with flattening the grass/vegetation they will bed down in.
If you ever watched a dog sleeping in the cold, they will ball up in a circle to conserve body heat. Another possible answer is as they circle, they spiral downward into their resting circle, with little waste of motion. This action may also adjust the sleeping surface to allow the best insulation R-value.