* Cattle futures, beef price gains stir cash optimism * Feeder cattle follow live cattle to new high * Cattle market lends hogs support, February expires By Theopolis Waters CHICAGO, Feb 14 (Reuters) - U.S. live cattle futures rose to an all-time high on Tuesday, as a devastating drought has reduced supplies, forcing investors to cover short positions taken last week when many thought the market had topped. Prices rallied to a record 126.90 cents per lb, with funds active buyers on a day when traders shrugged off a surge in the dollar, which dents exports, and an anemic stock market. Spot February live cattle surpassed the Jan. 25 peak of 126.37 cents, as wholesale beef prices rose for a third straight day, boosting optimism that cattle will trade higher in cash markets this week. "You've got the shorts that tried to sell it last week and tried to pick a top. And funds are pushing because they've got this thing on the run again," Jim Clarkson of A&A Trading said. A CME cattle trader said: "We could see steady to higher cash because the showlists are a little light, and if futures and the beef side hold together." There were no reported cash bids or asking prices after cattle last week in Nebraska and Kansas sold $1 per cwt lower at mostly $123, but up $1 in Texas at $124. Feedlot sources estimated the number of cattle available for sale this week are down by nearly 22,000 head from a week ago. Supplies have become scarce after a drought in the southwestern United States last year forced younger cattle off dried up pastures and into feedlots. The resulting cattle shortfall, along with robust beef exports and demand from retailers such as Wal-Mart for choice beef, pushed cash cattle prices to a record high $127 per cwt last autumn. Retail beef prices hit record highs for the fourth consecutive month in December, rising above $5.00. Speculative bulls also took the cue from mending beef packer margins. Hedgersedge.com estimated beef packer margins for Tuesday at a negative $40.30 per head, up $3.10 from Monday and a $27.50 improvement versus a week ago. Cattle futures made headway despite a weaker stock market and firmer dollar tied to disappointing U.S. retail sales data and euro zone downgrade worries. Funds that trade equities, and have commodities in their portfolios, typically buy or sell across a wide spectrum of those assets depending on the stock market's direction. A strong dollar usually deters foreign purchases of U.S. goods. Spot February live cattle closed up 1.125 cents, or 0.90 cent, at 126.650 cents per lb. Benchmark April ended 1.125 cents higher, or 0.88 percent, at 129.250 cents. Feeder cattle rose to a record 156.800 cents, prompted by live cattle advances, short-covering and technical buying. March settled up 1.525 cents, or 0.99 percent, at 156.250 cents. CATTLE HELP HOGS, FEBRUARY EXITS CME hogs gained slightly on short-covering and spillover support from live cattle. Those who traded spot February tracked its relationship to CME's hog index at 87.46 cents before the contract expired at noon. February settled up 0.125 cent per lb, or 0.14 percent, at 87.100 cents. Soon after spot February made its exit, benchmark April abruptly jumped on spreading into that contract out of the spot month. Fund buying emerged after April broke through 88.41-cents 20-day and 89.10-cents 10-day moving average resistance levels. April garnered additional supported from higher wholesale pork prices as some retailers looked ahead to spring grilling. April closed 1.650 cents higher, or 1.88 percent, at 89.625 cents.