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Yuan weakens to 11-1/2-year low on trade fatigue, but PBOC fixing offers some relief

A clerk counts Chinese 100 yuan banknotes at a branch of a foreign bank in Beijing

SHANGHAI (Reuters) - China's yuan weakened for the ninth straight session on Tuesday, plumbing new 11-1/2-year lows, as dramatic twists in the Sino-U.S. trade war left investors sceptical of the chances of a near-term deal.

Losses were kept in check, however, after the central bank set a daily midpoint that was stronger than traders expected, raising hopes it was again trying to stabilise the currency.

The yuan has lost nearly 3% against the dollar since Aug. 1, when U.S. President Donald Trump threatened to slap more tariffs on Chinese goods.

Prior to the market opening, the People's Bank of China (PBOC) lowered its official yuan midpoint to the weakest level since March 2008.

The midpoint rate was set at 7.0810 per dollar, 240 pips, or 0.34%, weaker than the previous fix of 7.0570.

The move was the biggest daily weakening in percentage terms since Aug. 7, but it was still 245 pips, or 0.35%, stronger than Reuters' estimate of 7.1055 per dollar.

"Apparently, (the PBOC) intentionally lifted the yuan fixing to stabilise the market," said a trader at a Chinese bank.

After allowing the yuan to break through the key 7 per dollar level on Aug. 5 in response to fresh U.S. tariffs threats, authorities have made several attempts to slow its decline and discourage bets on further depreciation.

Spot yuan lurched lower on Monday after both countries' announced more levies on Friday on each other's goods. But it later pared losses as Trump and China's top trade negotiator tried to calm frayed market nerves.

Trump on Monday predicted a trade deal with China after positive gestures by Beijing.

Both onshore and offshore yuan bounced in early trade on Tuesday, but quickly retreated. Onshore spot yuan opened at 7.1445 per dollar and was changing hands at 7.1600 at midday, 80 pips weaker than the previous late session close.

Its offshore counterpart rebounded to a high of 7.1558 before trading at 7.1715 per dollar as of midday.

The spot rate is currently allowed to trade with a range 2 percent above or below the official fixing on any given day.

Carie Li, an economist at OCBC Wing Hang Bank in Hong Kong, said she had expected the central bank to hold the official yuan midpoint above the 7.1 per dollar level.

"The market will interpret this as an effort to stabilise the currency," Li said.

"In the past they held the midpoint at 6.9, now they hold it at 7.10 ... It shows that they (PBOC) are still keen to manage the pace and scale of RMB depreciation," she said, adding that spot yuan is likely to swing in a range of 7.1-7.2 before more trade war news.

BofA Merrill Lynch Global Research said in a note that it has lowered its forecast for the yuan to 7.5 by the fourth quarter, from 7.3 previously.

"While the situation remains very fluid, the proposed tariff escalation last week represents a hardened stance by policymakers in China, perhaps emboldened by the U.S. delaying tariffs that were deemed economically costly."

Other investment banks including UBS and ANZ expect the yuan to finish this year at 7.2 per dollar in their latest forecasts.

"Our base case is that no trade deal is reached, and any de-escalation will only prove to be temporary," Khoon Goh, head of Asia research at ANZ in Singapore, said in a note, expecting the yuan to ease to 7.35 by the end of 2020.

(Reporting by Winni Zhou and John Ruwitch in SHANGHAI, Noah Sin in HONG KONG; Editing by Simon Cameron-Moore & Kim Coghill)