* Trade talks headlines turn sentiment sour, then sweet
* Yuan reverses losses to hit 2-wk high offshore, yen gives up gain
* Top-level trade talks set to begin in Washington
By Tom Westbrook
SINGAPORE, Oct 10 (Reuters) - The dollar eased against major currencies on Thursday and the yuan firmed as global markets remained fixated on Sino-U.S. trade talks in Washington, amid mixed signals over whether the two sides are making any progress in resolving the dispute.
Investors turned from downcast to bullish after Bloomberg reported the United States is weighing a currency pact with China as part of a partial deal that could see a planned tariff hike next week being suspended.
The dollar dropped more than 0.2% on the euro and the pound, and was 0.1% weaker against a basket of major currencies at 98.995. The euro rose to $1.0987.
Highlighting rapidly shifts in trade sentiment, China’s yuan, the most sensitive currency to the trade war, bounced to a two-week high from a month-low in offshore trade. By midday, it had firmed 0.3% and pulled the trade-exposed Australian and New Zealand dollars up with it.
The safe-haven Japanese yen jumped after a report in the South China Morning Post suggesting U.S.-China talks in Washington were headed for stalemate. But it later gave up its gains to trade flat at 107.46 per dollar.
“There are many headlines flying about, some negative, and some positive,” said Stuart Oakley, global head of flow FX at Nomura in Singapore.
“The USD/CNY fix (by China’s central bank) will be key to watch over the next 4-5 sessions. It’s been pegged around 7.0730 for several weeks. A move away from that level will give us a clear signal as to how the trade negotiations have gone.”
The United States is set to hike the tariff rate on $250 billion worth of Chinese goods to 30% from 25% next Tuesday.
Markets have gyrated for weeks as hopes for a de-escalation or breakthrough in the trade talks have waxed and waned, even as data pointed to further weakening in global growth.
Safe-haven currencies rallied after the SCMP, citing unnamed sources familiar with the discussions, said no progress was made on key issues and China’s lead negotiator, Vice Premier Liu He, planned leaving Washington a day early.
But a White House spokesman told CNBC he was unaware of any plans for Liu to leave early.
Then sentiment turned positive, and the yen began falling, after the Bloomberg report and a New York Times story suggesting a possible reprieve on U.S. restrictions on Chinese technology giant Huawei.
Liu is scheduled to meet U.S. Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin later on Thursday.
“The burden of expectations and back-forth news on trade is likely to keep market participants anxious and the price action noisy as the trade talks get underway,” Citi analysts said in a note.
“The risk seems skewed towards a higher USD/CNH on the other side of talks, in our view.”
The Australian dollar lifted from a week low to $0.6747 and the New Zealand dollar rose to $0.6313.
The pound climbed to $1.2228, though it remained close to a one-month low amid uncertainty over Britain’s exit from the European Union. Hopes for progress on a key sticking point were dashed overnight.
A slew of British data, including GDP estimates and monthly services and production figures are due at 0830 GMT. (Editing by Lincoln Feast; Jacqueline Wong & Kim Coghill)