The Chinese currency had a roller-coaster ride over the last two sessions, falling to a 5-1/2-week low on Wednesday before recovering all of its intraday losses, driven mostly by U.S. President Donald Trump's mixed messages on the trade talks.
He said talks with China were going "very well," a day after saying a deal might have to wait until after the 2020 presidential election.
Prior to market opening on Thursday, the People's Bank of China (PBOC) set the midpoint rate <CNY=PBOC> at 7.0521 per dollar, 139 pips or 0.2% weaker than the previous fix of 7.0382. Thursday's official fixing was the weakest since Oct. 11.
In the spot market, onshore yuan <CNY=CFXS> opened at 7.0535 per dollar and was changing hands at 7.0547 at midday, 39 pips weaker than the previous late session close.
Developments around the trade talks have been a key factor influencing the yuan's movements and market sentiment since tensions flared up between Washington and Beijing last year. And the recent twists and turns in the negotiations have affected investors' positions, traders said, adding that they expected volatility to increase in the near term.
Implied volatility in yuan options, which gauges investors' expectations for swings in the dollar against the yuan, rose across the board on Thursday morning.
Ken Cheung, chief Asian FX strategist at Mizuho Bank in Hong Kong, said optimism for a trade deal had faded.
Cheung said agreeing to a ceasefire on hiking tariffs on China in mid-December would be a "pragmatic solution" than striking a large-scale phase one deal.
He expects the yuan to trade at 7.05 per dollar at the year-end, rising slightly to 6.9 at end-2020.
Alica Garcia Herrero, chief economist for Asia Pacific at Natixis, said the market needs to be wary of a no-deal scenario.
"Whether an interim deal can be reached will have only limited consequences on the Chinese economy, but a sharp movement in the RMB as a consequence of a no-deal scenario might be more influential," she said in a note on Thursday.
The global dollar index fell to 97.549 at midday from the previous close of 97.648.
The offshore yuan <CNH=D3> was trading at 7.0565 per dollar as of midday.
(Reporting by Winni Zhou and John Ruwitch; Editing by Jacqueline Wong)