Forexpros – U.S. soft futures were lower during early U.S. morning trade on Wednesday, pausing after Tuesday’s sharp gains, as investors awaited the outcome of a policy-setting meeting by the Federal Reserve later in the day before pushing prices higher.

Cotton prices were mixed, with the front-month contract rising to a six-week high, while the December contract slumped 2% amid ongoing short-covering.

Meanwhile, sugar and coffee futures consolidated the previous day’s large gains.

Farm commodities received an additional lift from a broadly weaker U.S. dollar. The dollar index, which tracks the performance of the greenback against a basket of six other major currencies, was down 0.2% to trade at 81.45.

A weaker dollar boosts the appeal of U.S. crops to overseas buyers and makes commodities more attractive as an alternative investment.

Markets were awaiting the conclusion of a Federal Reserve policy-setting meeting later in the day, amid growing speculation the central bank will move to stimulate growth in the world’s largest economy.

A growing number of Fed watchers expect the central bank to extend its Operation Twist program, in which it sells short-term bonds to buy long-term ones. The current USD400 billion Twist program is set to expire at the end of June.

On the ICE Futures U.S. Exchange, cotton futures for July delivery traded at USD0.8902 a pound, rallying 1.2%. It earlier rose by as much as 1.7% to trade at USD0.8948 a pound, the highest since May 4.

Meanwhile, the new-crop December contract was down 2% to trade at USD0.7433 a pound.

Front-month cotton prices have surged nearly 17% in the seven sessions leading up to Tuesday, as prices were boosted by a flurry of short covering ahead of the first notice of delivery for the July contract on June 25.

Market players said that a large cotton trading house has put pressure on traders holding short positions in July to exit those positions.

Trading is normally intense in the cotton market in the run-up to the first notice day for deliveries, as most market participants seek to exit contracts to avoid having to deliver supplies.

Prices continued to draw support from signs of increasing demand from top consumer China after the U.S. Department of Agriculture announced a huge sale of new-crop cotton to China last week.

China bought close to 94% of the 795,700 bales of the net export sales from the U.S. in the week ending June 7, in an attempt to boost government stockpiles after prices fell to attractive levels.

Front-month prices slumped to a 32-month low of USD0.6617 a pound on June 4. But futures have been on an uptrend in recent sessions, gaining nearly 25% since then.

Despite the recent gains, the fiber is still down almost 60% from a record in March 2011 as higher prices prompted farmers to plant more crops and demand in top consumer China slowed.

Elsewhere on the ICE Futures U.S. Exchange, Arabica coffee for September delivery traded at USD1.5800 a pound, easing down 0.3%. The September contract traded in a tight range of USD1.5918 a pound, the daily high and a session low of USD1.5728.

Coffee fell to as low as USD1.4887 a pound on June 14, the lowest for the second-month contract since mid-June 2010, as the market moved lower ahead of the harvest from Brazil.

But prices surged nearly 5% on Tuesday, the biggest one-day gain in eight months, as large institutional investors returned to the market to seek cheap valuations amid hopes for further Fed easing.

Some short-covering further supported prices.

Despite the gain, coffee prices have been under pressure in recent months, losing nearly 34% since mid-January as traders eyed a huge harvest in top grower Brazil and speculators pushed prices lower.

Market participants said that coffee prices remain vulnerable to losses as hedge funds and large institutional investors liquidate long positions amid concerns over the global macroeconomic outlook.

Jitters over the global economic outlook have weighed on soft commodities in recent weeks.

Meanwhile, sugar futures for July delivery traded at USD0.2145 a pound, dipping 0.15%. The July contract traded in a range between USD0.2155 a pound, the daily high and USD0.2118 a pound, the session’s low.

Prices touched USD0.2158 a pound on Tuesday, the highest since April 26.

Sugar prices have gained approximately 12% since dropping to a two-year low of USD0.1886 a pound on June 4, as concerns that heavy rains in Brazil could damage sugarcane crops in the country’s center-south region boosted sentiment on the sweetener.

The nation’s leading sugar cane industry association Unica said last week that mills in the center-south crushed 35.62 million metric tons of cane in the second half of last month, down 18% from a year earlier.

Brazil’s Center South-region produces nearly 90% of the nation’s sugar. Brazil is the world’s largest sugar producer and exporter, with the USDA estimating the nation accounts for nearly 20% of global production and 39% of global sugar exports.

However, market participants were wary of pushing prices higher, as the sugar market remains in a major bear trend. Prices are down approximately 42% since hitting a three-decade high of USD0.3594 in February of last year.