* U.S. CPI core inflation slightly below expectations
* Benchmark 10-year Treasury note auction sees tepid demand
* Graphic: World FX rates https://tmsnrt.rs/2RBWI5E (Adds details of U.S. 10-year Treasury auction, analyst comments; updates prices)
By John McCrank
NEW YORK, March 10 (Reuters) - The dollar edged lower on Wednesday following a tame U.S. inflation report and a tepid auction of benchmark 10-year Treasury notes US10YT=RR , while riskier currencies like the Australian and New Zealand dollars rose on improving global growth prospects.
U.S. consumer prices posted their biggest annual gain in a year, though underlying inflation remained tepid amid sluggish demand for services like airline travel, the data showed. move was largely in line with economists' expectations, though core inflation rose 0.1% versus market forecasts for a 0.2% rise.
U.S. Treasury yields slid following the data, as market participants had hoped for a more upbeat outlook on consumer prices. dollar index has closely tracked a surge in Treasury yields this year, both because higher yields increase the currency's appeal and as the bond rout shook investor confidence, spurring demand for safe-haven assets.
"The drive of the dollar's movement since the beginning of the year has been U.S. interest rates, and I just don't see that scenario changing," said Joseph Trevisani, senior analyst at FXSTREET.COM.
Bond yields fell and prices rose after an auction of 10-year Treasury notes showed tepid demand with lower than average bid-to-cover ratio. auctions have been closely watched after poor demand for an auction of 7-year notes US7YT=RR two weeks ago sparked a sell-off in government bonds. auction of 30-year Treasuries is scheduled for Thursday.
The dollar index =USD was down 0.17% at 91.845.
"Bonds are getting stronger, which means the dollar relatively speaking, may be less attractive," said Axel Merk, president and portfolio manager at Merk Hard Currency Fund in Palo Alto California.
"Bonds had quite a sell-off and many would have argued that it may have been overdone," he said.
Riskier currencies including the Australian AUD= and New Zealand dollars NZD= were higher on rising prospects for the global economic recovery. The Aussie and Kiwi dollars were both up 0.27% at $0.7732 and $0.7186 respectively.
U.S. President Joe Biden's sweeping $1.9 trillion COVID-19 relief bill won final approval in the House of Representatives on Wednesday. The White House said Biden plans to sign the bill into law on Friday. euro EUR=EBS was up 0.16% at $1.19195 ahead of a meeting of the European Central Bank on Thursday.
One topic is expected to dominate the ECB meeting: what to do about rising sovereign bond yields, which, if left unchecked, could derail efforts to get the coronavirus-hit economy back on track. Bank of Canada on Wednesday left its key overnight interest rate unchanged at 0.25%, as expected, and said the Canadian economy was proving to be more resilient than anticipated to the second COVID wave and containment measures. Canadian dollar CAD=D3 , which has been one of the best-performing currencies versus the greenback, was 0.06% lower at $1.2629.
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