* Trade talks headlines turn sentiment sour, then sweet
* Yuan reverses losses to hit 2wk high offshore, yen gives up gain
* Top-level trade talks set to begin in Washington
By Tom Westbrook
SINGAPORE, Oct 10 (Reuters) - Currencies whipsawed on Thursday as news suggesting division, then detente in Sino-U.S. trade talks sparked volatility, with riskier Asian currencies ultimately rallying over a sinking dollar.
Investors, parsing headlines for any clues that tensions weighing on global growth could be resolved, turned from downcast to bullish after Bloomberg reported a currency pact could be part of a deal suspending further tariff hikes. yuan, CNH= the most sensitive currency to the trade war, bounced to a two-week high from a month-low in offshore trade, gaining 0.3% by mid-session and pulling the trade-exposed Australian and New Zealand dollars up with it.
The safe-haven Japanese yen, which had first jumped on a gloomy report in the South China Morning Post suggesting U.S.-China talks in Washington were headed for stalemate, gave up its gains to trade flat on the dollar at 107.46 JPY= .
"There are many headlines flying about, some negative, and some positive," said Stuart Oakley, global head of flow FX at Nomura in Singapore.
"The bottom line is we will have the clarity on how this has gone at midnight Tuesday (in Washington) as that is when we'll know if the next round of tariffs have been imposed or delayed," he said.
"The USD/CNY fix 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 for weeks gyrated as the likelihood of a breakthrough at the talks has waxed and waned while signs of the toll that the Sino-U.S. trade dispute is taking on the global economy have growth in strength and number.
That played out in microcosm in volatile trade on Thursday.
Safe-haven currencies at first 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. turned neutral after a White House spokesman told CNBC he was unaware of any plans for Liu to leave early. it 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. 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."
Besides steadying on the yen, the dollar fell against most other major currencies, dropping 0.3% on the antipodean dollars and 0.2% on the euro and pound. It last stood weaker against a basket of currencies .DXY at 99.021.
The Australian dollar lifted from a week low to $0.6746 AUD= and the New Zealand dollar rose to $0.6311. The euro rose to $1.0991 and the Chinese yuan CNY= rose 0.3% to 7.1127 in onshore trade, its strongest since Sept. 24.
The pound climbed to $1.2228, though it remains close to a one-month low and weighed down by uncertainty over Britain's exit from the European Union, as hopes for progress on a key sticking point were dashed overnight. (Editing by Lincoln Feast and Jacqueline Wong)