* U.S. CPI core inflation slightly below expectations
* All eyes on U.S. 10-year Treasury auction
* Graphic: World FX rates https://tmsnrt.rs/2RBWI5E (Adds dollar moves after U.S. CPI data, analyst comment, updates prices, changes dateline to New York from London)
By John McCrank
NEW YORK, March 10 (Reuters) - The dollar ticked higher on Wednesday, rebounding from a slight dip after a tame U.S. inflation report, while traders looked to an auction of U.S. 10-year Treasury bonds US10YT=RR later in the day that could spark volatility in currency markets.
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 inline with economists' expectations, though core inflation rose 0.1%, versus market forecasts of a 0.2% rise.
U.S. Treasury yields backtracked slightly 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.
The greenback will likely trend higher through mid-year as the economic recovery gains steam, he said.
The dollar index =USD was up 0.026% at 92.022, having edged lower earlier in the session following the CPI numbers.
Bond yields could rise further this week as the market digests a $120 billion auction of 3-, 10-, and 30-year Treasuries. 10-year auction today is the main risk to market sentiment, followed by a 30-year US30YT=RR auction on Thursday, as low demand could reinstate pressure on U.S. Treasuries, ING strategists said in a daily note.
"Equally, a good take-up could reiterate the risk-friendly mood in FX markets observed yesterday. Hence, one should get ready for a day of volatility with the FX market looking for signs of confirmation as to whether the risk rally yesterday was a short-term blip or the tentative start of a trend."
Riskier currencies including the Australian AUD= and New Zealand dollars NZD= edged lower after logging big gains on Tuesday on rising prospects for the global economic recovery.
U.S. President Joe Biden is expected to sign a $1.9 trillion coronavirus aid package as soon as this week. euro EUR=EBS was down 0.06% at $1.18915 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. the recent move in bond yields has not spared the euro zone, the tightening in financial conditions has been far less of a problem for the ECB given the different nominal starting point," said Geoff Yu, EMEA market strategist at Bank of New York Mellon (NYSE:BK).
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