July 8 (Reuters) - ICE cotton futures rose to their highest level since early March on Wednesday, breaking above a key technical level, as concerns persisted over damage to the crop due to dry weather in major cotton producing states.

* Cotton contracts for December rose 0.86 cent, or 1.4%, to 63.88 cents per lb by 2:07 p.m. EDT (1807 GMT). Earlier in the session, the contract touched 64.33 cents, its highest level since March 5.

* “The continued dry weather in Texas and breaking of the 200-day moving average ... is moving the market higher today,” said Louis Barbera, partner and analyst at VLM Commodities LTD.

* “We are in the middle of the rebalance of the index funds and those are adding commodities due to weakness in dollar.”

* The dollar index fell half a percent, making commodities priced in the greenback, like cotton, cheaper for holders of other currencies.

* However, rising virus cases have weighed on demand for apparels, prompting the natural fiber to plunge about 10% so far this year.

* “With respect to demand, the cotton market remains on life support, with little relief in sight,” Louis Rose, director of research and analytics at Tennessee-based Rose Commodity Group, said in a note.

* The U.S. coronavirus outbreak crossed a grim milestone of over 3 million confirmed cases on Tuesday as more states reported record numbers of new infections.

* Investors now await the United States Department of Agriculture’s (USDA) weekly export sales report, due on Thursday.

* U.S. export sales and shipments are ahead of pace required to meet USDA target, according to Rose’s note.

* Total futures market volume fell by 4,228 to 16,060 lots. Data showed total open interest gained 759 to 168,486 contracts in the previous session. (Reporting by Diptendu Lahiri in Bengaluru Editing by Matthew Lewis)