UPDATE 1-Cotton surges 3% to 1-month high on U.S.-China trade optimism

(Adds analysts' comments, market details, updates prices)

July 1 (Reuters) - ICE cotton futures prices surged 3% on Monday to scale a one-month peak, after U.S. President Donald Trump said China has agreed to buy U.S. farm products and resume trade talks, while a stronger dollar kept the natural fiber under pressure.

The most-active cotton contract on ICE Futures U.S., the third-month December contract , was up 0.46 cent or 0.70% at 66.54 cents per lb as of 2:23 p.m. EDT (1823 GMT).

The contract gained as much as 3% to 68.35 cents per lb earlier in the session, its highest level May 31.

The news on U.S.-China trade truce improved investor sentiment and helped prices rise, said John Bondurant, a trader in Memphis, Tennessee.

Beijing agreed to make unspecified new purchases of U.S. farm products and return to the negotiating table, Trump said, after meeting his Chinese counterpart Xi Jinping at the G20 summit in Osaka, Japan.

The United States is one of the largest producer of the natural fiber, while China is the biggest consumer. Cotton prices have suffered over the past year due to poor trade relations between the two countries.

However, the contract pared some gains due to a stronger U.S. currency and technical sell-off.

The dollar was up 0.7 percent against its key rivals, making cotton costlier for investors holding other currencies.

"Dollar opened up pretty strong and rallied, wreaking havoc on the cotton prices," said Jon Marcus, president of Lakefront Futures and Options brokerage in Chicago. "We have a lot of resistance at 68.50 cents and as the market couldn't get through that, people started to sell their positions."

He added that on a technical front, if there is a price gap between previous day's high and current day's low, prices would come down to bridge the gap.

Total futures market volume rose by 14,532 to 30,687 lots. Data showed total open interest fell 187 to 175,758 contracts in the previous session.

Meanwhile, China cotton futures on the Zhengzhou Commodity Exchange were down 0.80% at 13,690 yuan per tonne. The spread between China futures and U.S. cotton was 60.02 cents. (Reporting by K. Sathya Narayanan and Karthika Suresh Namboothiri in Bengaluru Editing by Susan Fenton and Matthew Lewis)