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GRAINS-Highest grain prices in weeks as U.S. dollar falls, Argentina bakes

* Short-covering helps lift markets

* Gains prompt farmers to sell corn from storage

* Traders eye dry weather in South America (Adds closing prices, analyst comment, estimate for Argentina corn crop)

CHICAGO, Jan 24 (Reuters) - U.S. grain and soybean futures rose to their highest prices in weeks on Wednesday on technical buying, a slide in the U.S. dollar and dry weather in rival exporter Argentina.

The dollar's decline to a three-year low prompted corn and wheat traders to buy back previously sold positions, brokers said, after speculators built up short positions in the face of massive global grain inventories. Stockpiles have increased from years of bumper U.S. harvests, knocking prices down 50 percent from six years ago.

"All corn and wheat needed was a spark at this point," said Jim Gerlach, president of broker A/C Trading in Indiana.

"You've got the funds short out the wazoo. Now you've got the dollar working against them."

Weakness in the dollar is generally considered supportive for U.S. grains because it makes the crops more attractive to global buyers.

The most actively traded corn contract at the Chicago Board of Trade ended up 5-1/4 cents at $3.56-1/2 a bushel after touching $3.57, its highest price since Dec. 5. That was also the highest price for a nearby contract since Sept. 29.

CBOT wheat jumped 11-1/2 cents to $4.33 a bushel and reached its highest price since Jan. 12. Soybeans settled up 6 cents at $9.92-1/4 a bushel after reaching its highest price since Dec. 8

"The short-covering is just starting," said Joe Davis, a director with Chicago broker Futures International. "It could extend even further.

The gains encouraged farmers to sell corn they had put in storage due to low prices, merchants said.

Such selling will likely keep a lid on rallies, said Tomm Pfitzenmaier, analyst for Summit Commodity Brokerage in Iowa.

Helping propel prices higher were concerns about drought in parts of Argentina, the world's third-largest soybean producer and largest exporter of soymeal and soyoil, traders said. Dryness there has fuelled forecasts for lost plantings and yield damage that could potentially tighten global supplies and make U.S. exports look more attractive.

Argentine farmers will likely harvest 40 million tonnes of corn, according to a U.S. Department of Agriculture attache report, which pegged production about 5 percent less than the agency's official forecast. Some fields sown for commercial corn production were instead chopped up and converted into silage for cattle feed, the report said.

"There are still many uncertainties over the final estimate as the weather has been very dry and hot," the report said. (Additional reporting by Julie Ingwersen in Chicago; Editing by Tom Brown and Lisa Shumaker)