NEW YORK, Aug 2 (Reuters) - Cotton futures closed sharply
higher, but not before setting a near three-week high, after
the U.S. Senate passed a new debt bill, restoring confidence in
soft commodity markets, analysts said.

As upside targets were breached, the technical outlook
became even more bullish, drawing new buyers into the market.

'All agricultural commodities had experienced some pressure
on the fear factor, as a cadre of investors exited the market
on the unknown about what would happen with the debt ceiling,'
said Ron Lawson Managing Director of logicadvisors.com.

'Upon passage, that fear was removed and they reentered the
market. So on a macro sense, there was a bit of buying from
that (factor),' he added.

Key December cotton futures on ICE Futures U.S.
ended with hefty gains, climbing 1.80 cents to $1.0685 per lb,
a 1.7 percent increase.

Shortly before the finish it rallied up to $1.0862 per lb,
a peak dating back to July 14. Though it failed to close a
second gap at $1.0888, it did finish above Monday's high at
$1.0532, which according to Mike Stevens, an independent cotton
analyst in Mandeville, Louisiana, 'would look extremely strong
and set up a test of the key $1.0885 to $1.0888 gap, left the
middle of July.'

Stevens cites an ultimate near-term target range between
$1.1100 to $1.1200 per lb.

Toward the end of cotton's session, President Barack Obama
signed into law a measure to cut spending and raise the U.S.
debt ceiling, a necessary act to avert an unprecedented default
on U.S. government financial obligations.

Once the measure was passed cotton traders resumed buying
of cotton futures, which some players feared would only
continue to gain with 30 percent of the U.S. crop already
estimated to fail.

Severe drought in the biggest growing state was expected to
have damaged 40 percent of the Texas crop, along with 30
percent of the U.S. crop overall, said Lawson.

At some point, that will likely lead to a short squeeze as
delivery date for December futures draws closer.

In the mean time, the speculators/hedgers report released
late on Monday and the CFTC's Commitment of Traders report on
Friday continue to confirm that speculators are building long
positions.

In India, cotton prices are likely to rise this week on a
government decision to allow unrestricted export of the fibre
for the two remaining months of the current season that ends
September, traders, dealers and analysts said.